OVERVIEW: TOWARDS A GREEN AND JUST TRANSITION

The role of the corporate sector has become increasingly significant in the region. Over the period December 2014 to September 2021, corporates led total GSSS bond volumes with a share of 42% of the total LAC GSSS bond issuance, while sovereigns represented 37%, quasi‑sovereigns 12% and supranational issuers 5% (Figure 7, Panel B).

Financial strategies will have to enhance private and public sector resource mobilisation, in part by engaging key actors including subnational, national and international development finance institutions (DFIs). Enhancing green fiscal frameworks (e.g. through green golden rules) will be crucial as will expanding sustainable finance frameworks to ensure that public and private investments effectively reach environmentally sustainable projects. Since the private sector will account for most of the investment needed to undertake the transition, the public sector will have to create the necessary incentives to redirect these investments toward sustainable projects. To facilitate this, it will be necessary to improve and expand sustainable finance frameworks to ensure that the right regulatory tools are in place (e.g. sustainability standards and green, sustainable, or transition taxonomies). Mechanisms to avoid greenwashing will be critically important.

Developing compensation mechanisms (e.g. in‑kind transfers, ALMPs, self‑employment and entrepreneurship programmes) will be crucial for vulnerable households affected negatively by climate reform. Well targeted cash transfers and in‑kind transfers will continue to be essential, together with compensation policies to support the relocation and retraining of workers, promote decent work in rural areas, develop new business models, and provide support for displaced workers.

Figure 7.

Note: Panel B: Sov = sovereign. Corp = corporate. Ssov = sub‑sovereign (states, cities and provinces). Supr = supranational. Qsov = quasi‑sovereign. Quasi‑sovereign issuers are defined as companies with full or partial government ownership or control. Supranational issuers are defined as entities formed by two or more central governments to promote economic development for the member countries. The “bank” category refers to commercial banks. Other non‑bank financial institutions are included in corporates.

Source: (Núñez, Velloso and Da Silva, 2022[15]).

StatLink2 https://stat.link/5wluj3

Advancing the green transition will require institutional mechanisms to foster consensus and build a long‑term vision underpinning a new social contract

LAC citizens are broadly concerned about the seriousness of climate change ‑ and relatively more so than other regions globally. This suggests that the recovery could represent a “critical juncture” for advancing towards a new, sustainable social contract. On average, 68% of citizens in LAC recognise that climate change is a very serious threat to their country in the next 20 years (Figure 8). In sharp contrast to some countries, such as the United States, concern about climate change in LAC is consistent across the political spectrum (Evans and Zeichmeister, 2018[16]). The importance LAC citizens place on the green agenda could make the green transition the cohesive element of a wider social contract for the region.

Figure 8. Share of citizens who agree that climate change is a very serious threat to the country in 20 years, 2019

Notes: Question for Figure 8: “Do you think that climate change is a very serious threat, a somewhat serious threat, or not a threat at all to the people in this country in the next 20 years? If you don’t know, please just say so”.

Source: Authors’ elaboration based on (Lloyd’s Register Foundation, 2020[17]). StatLink2 https://stat.link/i85nup

In practice, as the green transition may involve a shift of resources among economic sectors and political constituencies that could trigger the opposition of some interest groups, to build consensus it will be important to establish inclusive and shared platforms for reaching a negotiated stance. Encouraging the participation of citizens, civil society groups, women, indigenous and local communities throughout the policy‑making process can promote greater local ownership and generate more inclusive policies that appropriately consider local needs. Policy makers should also bring on board the private sector by raising awareness of responsible business conduct (RBC) practices and establishing stronger integrity policies to avert the risk of environmental policy capture by powerful groups. In addition, adapting the strategy to specific socio‑political contexts is vital, as is devising empowering and empathic communication strategies about the proposed green reform agenda. In turn, strategies must include specific compensation mechanisms for vulnerable groups that may be negatively affected in the short term.

As the green transition affects virtually every domain of public policy, policy makers should work more strategically and achieve better co‑ordination across sectors and levels of government to ensure a coherent green agenda. An integrated approach will be needed to balance economic, social and environmental trade‑offs while also leveraging policy spillovers among these fields.

Linking policy objectives with long‑term plans is also key to ensure consistent implementation over time, beyond short‑term political cycles. Governments need to articulate a long‑term vision to align their actions. This can be done through frameworks such as national development plans (NDPs), nationally determined contributions (NDCs) coupled with climate strategies, and defined policies and regulations to underpin their pledges. NDCs establish concrete targets and policies, setting the basis for the contributions of various stakeholders in national efforts to achieve the long‑term goals of the Paris Agreement. While most LAC countries have already submitted an update to their NDCs, Costa Rica’s 2020 update is among the few that are rated 2°C compatible (CAT, 2020[18]). Argentina, Brazil, Colombia, Costa Rica and Panama have set only unconditional targets. In contrast, the majority of LAC countries also set conditional targets, meaning that implementation of these commitments depends on the delivery of international financial and technical support. This highlights the critical importance of collective action and co‑operation at both national and international levels for achieving the goals of the Paris Agreement.

LAC should profit from an international green agenda that proposes new partnerships for the region’s development as well as new tools to foster the transition

Considering the global nature of the increasingly urgent need to reduce CO 2 emissions, all countries are called to participate in individual and collective efforts. Decoupling economic development from CO 2 emissions has proven possible, as illustrated by the recent trajectories of certain regions (Figure 9). At the same time, LAC countries should play a predominant role in this global agenda by sharing experiences of sustainable development with other regions and having a leading voice at climate negotiations. Climate change has shown that continuing a path of exponential growth of CO 2 emissions is no longer an option. LAC countries can reach higher human development index (HDI) levels while meeting low emissions targets.

Note: Climate Watch Historical CO 2 Emissions excluding LUCF.

Source: Authors’ calculations based on (Climate Watch, 2022[11]) and (UNDP, 2022[19]).

StatLink2 https://stat.link/djn2w1

OVERVIEW: TOWARDS A GREEN AND JUST TRANSITION

To date, as each country negotiates within multiple climate‑related international coalitions, the LAC region has lacked a unified voice in the international arena (Figure 10). This is the result of both the existing fragmentation of LAC regional integration processes and subregional economic ties. Preventing further fragmentation of environmental policies and the politicisation of environmental instruments is crucial to harness the full potential of the green transition. In many ways, LAC’s fragmented voice in climate negotiations constitutes a missed opportunity, especially considering that the region hosts 50% of the planet’s biodiversity. Future efforts will need to prioritise enhanced policy dialogue and a regional environmental agenda.

Figure 10. LAC countries’ participation in climate‑related international coalitions

Chile

Panama

Argen

Costa Rica*

Guatemala*

Honduras*

Barbados*

Grenada*

An gua and Barbuda

Hai *

Bahamas

Saint Ki s and Nevis

Saint Vincent and the Grenadines

Guyana*

St. Lucia*

Jamaica

Suriname

Belize

Dominican Republic*

Dominica

El

Ecuador

Note: *Members of the Climate Vulnerable Forum (CVF). A‑B‑U = Argentina, Brazil and Uruguay. AILAC = Independent Alliance of Latin America and the Caribbean. ALBA = Bolivarian Alliance for the Peoples of Our America. AOSIS = Alliance of Small Island States. CfRN = Coalition for Rainforest Nations. EIG = Environmental Integrity Group. LDCs = least‑developed countries. LMDCs = like‑minded developing countries. OPEC = Organisation of the Petroleum Exporting Countries. SIDS = small island developing states. Figure is a non‑exhaustive representation of coalitions in the region; some coalitions relate to the environment as part of a broader agenda.

Source: Authors’ elaboration based on (Delgado Pugley, 2021[20]); (Klöck et al., 2020[21]) and (Watts and Depledge, 2018[22]).

Trade is one of the channels through which the green transition will impact the LAC region. It represents a challenge in that, over the last two decades, LAC has consistently posted a deficit in its trade in environmental goods (environmental specific services, environmental sole‑purpose products, adapted goods and environmental technologies).

Three‑quarters of the region’s imports of environmental goods come from China, the United States and the European Union, while intraregional imports account for just 5% of total expenditure. Moreover, regional export capacity is highly concentrated: between 2018 and 2020, just one country (Mexico) accounted for 84% of regional exports of environmental goods.

The European Green Deal may have implications for LAC countries, potentially affecting trade between the two regions. In particular, as the EU Green Deal increases demands for traceability, transparency, compliance and due diligence, as well as low‑carbon, organic and sustainable production and reinforcement of the circular economy, LAC countries

OVERVIEW: TOWARDS A GREEN AND JUST TRANSITION will need to adapt to these new international environmental standards and regulations. LAC countries that trade with Europe have the opportunity to align national climate change mitigation plans so as to use “the new rules of the game” to execute a productive transition.

Indeed, the trade channel holds opportunities as well. The transition to a circular economy requires LAC countries to design specific public policies for the entire life cycle of products, including production, consumption, waste management and recycling. Public and private investments and co‑operation are critical for increasing capacity building, innovation and technology transfer. Transitioning to the circular economy also depends on the co‑ordination of LAC’s national and international efforts. From reducing tariffs and non‑tariff barriers to enhancing the granularity of international trade classifications, harmonising standards for circular economy goods could help firms, countries and regional actors adopt sustainable practices.

References

Alejos, L. (2021), What are the fiscal risks from extreme weather events and how can we deal with them?, Inter‑American Development Bank, Washington, DC, https://blogs.iadb.org/gestion fiscal/ en/what are the fiscal risks from extreme weather events and how can we deal with them/#:~:text=It%20is%20estimated%20that%20the,income%20countries (Figure 2). [7]

Alejos, L. (2018), Three Essays in Public Finance in Developing Countries, University of Michigan, Ann Arbor, MI, https://deepblue.lib.umich.edu/bitstream/handle/2027.42/147524/lalejos_1.pdf?sequence =1&isAllowed=y [4]

CAT (2020), Climate Target Update Tracker: Costa Rica, Climate Action Tracker, Climate Analytics/ NewClimate Institute, Berlin, https://climateactiontracker.org/climate target update tracker/ costa rica/. [18]

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Delgado Pugley, D. (2021), América Latina frente a la COP26: Posiciones y perspectivas, Fundación Carolina, Madrid, https://doi.org/10.33960/issn e.1885 9119.DT58 [20]

EM‑DAT (n.d.), EM‑DAT Public, Emergency Events Database, Brussels, https://www.emdat.be/ database [5]

Evans, C. and E. Zeichmeister (2018), Education and Risk Assessments Predict Climate Change Concerns in Latin America and the Caribbean, Latin American Public Opinion Project, Vanderbilt University, Nashville, https://www.vanderbilt.edu/lapop/insights/IO929en.pdf [16]

FAO (2022), FAOSTAT Emissions, Food and Agriculture Organization, Rome, https://www.fao.org/ food agriculture statistics/data release/data release detail/en/c/1304919/. [9]

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Hardy, W., R. Keister and P. Lewandowski (2018), “Educational upgrading, structural change and the task composition of jobs in Europe”, Economics Of Transition, Vol. 26, https://onlinelibrary. wiley.com/doi/full/10.1111/ecot.12145 [14]

IDB (2021), Fiscal Policy and Climate Change: Recent Experiences of Finance Ministries in Latin America and the Caribbean, Inter‑American Development Bank, Washington, DC, https://publications.iadb. org/publications/english/document/Fiscal Policy and Climate Change Recent Experiences of Finance Ministries in Latin America and the Caribbean.pdf [6]

IMF (2022), World Economic Outlook, April 2022: Wars Set Back the Global Economy, International Monetary Fund, Washington, DC, http://www.imf.org/en/Publications/WEO/Issues/2022/04/19/ world economic outlook april 2022 [2]

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Klöck, C. et al. (2020), Coalitions in the Climate Change Negotiations, Routledge, London, https://doi.org/ 10.4324/9780429316258. [21]

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OVERVIEW: TOWARDS A GREEN AND JUST TRANSITION

Núñez, G., H. Velloso and F. Da Silva (2022), Corporate governance in Latin America and the Caribbean: Using ESG debt instruments to finance sustainable investment projects, Economic Commission for Latin America and the Caribbean, Santiago, https://repositorio.cepal.org/handle/11362/47778. [15]

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Watts, J. and J. Depledge (2018), “Latin America in the climate change negotiations: Exploring the AILAC and ALBA coalitions”, WIREs Climate Change, Wiley Interdisciplinary Reviews, Wiley‑Blackwell, Hoboken, NJ, https://doi.org/10.1002/wcc.533. [22]

Chapter 1

Addressing the structural macro context to drive the green transition

The COVID‑19 recovery in Latin America and the Caribbean (LAC) is slowing down, reflecting low potential growth and an increasingly complex international context driven by Russia’s war against Ukraine and an economic slowdown in China. The socio‑economic consequences of COVID‑19 linger, with poverty and extreme poverty still high. With macroeconomic policy space being reduced, most LAC countries will face the multidimensional challenge of balancing recovery stimulus, financing the green transition, and protecting the most vulnerable, particularly from the impact of inflationary pressures. After analysing the global context, this chapter presents the economic performance and critical factors affecting the pace and shape of the recovery in LAC. The chapter then analyses the weight of climate change on fiscal accounts and explores some options to mobilise further resources to promote the green transition. Before concluding, the chapter discusses the deteriorated post‑COVID‑19 social conditions, particularly poverty and inequality, and the need to strengthen social protection systems.

Addressing the structur Al m Acro context to drive the green tr Ansition

Addressing the macroeconomic challenges of LAC to ensure a green and just transition

Growth in LAC economies will slow down in 2022 driven by an increasingly adverse global backdrop, scal and monetary stimuli rollbacks, and low potential growth

The extreme poor face a higher price increase than the average household for the extreme poor

Jan-May 2022, annual basis) is limited, and the level and cost of public debt have been rising

Public debt-to-tax ratios increased from 2013-19 and rose significantly in 2020

Poverty and extreme poverty are expected to increase in 2022, due to low economic growth and high in ationary pressures

Introduction

Following a robust economic rebound in 2021, growth in LAC economies will slow down in 2022. This is driven by an increasingly adverse global backdrop, fiscal and monetary stimuli rollbacks, and low potential growth. Inflationary pressures are mounting, and most central banks in the region are raising policy rates.

Social challenges from the pandemic remain, with an expected increase in poverty in 2022. Even though there was a decrease in total poverty levels between 2020 and 2021, these are projected to increase in 2022 due to rising inflation, especially in food prices. Extreme poverty did not recede in 2021 and is expected to increase in 2022. It is estimated that, by 2022, 33.7% of the LAC population will be in poverty and 14.9% in extreme poverty (ECLAC, 2022[1]). This has translated into downward mobility in the socio‑economic stratum. The incidence of poverty is heterogeneous not only among countries in the region but also among population groups. For instance, women aged 25 to 39 have higher poverty rates than men of the same age in all countries. Inequality in income distribution has also increased in most countries, with current high inflation posing a risk of a further increase (ECLAC, 2022[2]).

With restrictive monetary conditions, fiscal policy management is at the recovery’s core. As in other regions, inflation rates have increased substantially; therefore, most central banks have responded appropriately with interest rate increases. Since the end of 2021, many of the region’s economies have started to withdraw some fiscal stimulus, and tax revenues have increased thanks to the improvement in economic conditions, thus narrowing primary fiscal deficits. LAC economies must support economic conditions and fiscal sustainability, while protecting the most vulnerable through strengthening social protection systems. In the future, climate change and the green transition can weigh heavily on fiscal accounts as natural disasters, the phasing out of fossil fuels from the energy matrix, or stranded assets can diminish revenues. Therefore, the region will need to mobilise resources to compensate for shortfalls and to invest more, better and greener to reduce the adverse effects of climate change and finance the green transition. A green transition goes beyond fighting climate change. It also aims to advance a more sustainable and inclusive model of production and consumption that creates new, quality, green jobs, generates the conditions for workers to successfully navigate the transition, and supports firms to adopt more sustainable production schemes and citizens to change their consumption habits (Chapter 2).

Global economic prospects are weakening stemming from the invasion of Ukraine by the Russian Federation (hereafter “Russia”) and the lingering effects of the coronavirus (COVID 19) pandemic and strategies to contain it. The impact of Russia’s invasion of Ukraine will vary across regions, depending on their commercial and financial exposure to Russia or Ukraine. Russia’s invasion of Ukraine has also pushed up commodity prices, fuelling inflation. Disruptions in global supply chains, high freight costs, and demand and supply imbalances have contributed to the build‑up of inflationary pressures not seen in decades and that go beyond food and energy. Similarly, the zero‑COVID policy of the People’s Republic of China (hereafter “China”) continues to weigh on the global outlook and trade flows (OECD, 2022[3]; OECD, 2022[4]).

This chapter first examines the global context, focusing on the consequences of Russia’s war against Ukraine and the growing inflationary pressures. It then presents the economic performance in LAC, highlighting the region’s heterogeneity, external accounts, growing inflationary pressures, and tight fiscal space, especially to finance the green transition and face the adverse effects of climate change. Last, the chapter examines the remaining social consequences of the COVID‑19 crisis, focusing on poverty and inequality, the nexus with inflation, and the importance of strengthening universal, comprehensive, sustainable and resilient social protection systems.

An increasingly challenging global context

After the strong recession generated by the COVID‑19 pandemic in 2020, the global economy grew at a robust pace in 2021, supported by the advance of vaccination programmes and the massive fiscal and monetary stimulus packages applied by most countries. The economic rebound of 2021 was widespread, with an estimated global growth of 5.8%, much higher than the contraction of 3.4% reported in 2020 (IMF, 2022[5]; OECD, 2022[3]; OECD, 2022[4]).

In 2022, global economic growth has slowed due to deteriorating global conditions, fuelled by the war in Ukraine and the lingering effects of COVID‑19, mostly China’s zero‑COVID policy. Russia’s war against Ukraine impacted global recovery. Before the outbreak of the war, global growth was projected to return to rates similar to those prevailing before the pandemic, and inflation was seen as a temporary phenomenon. China’s zero‑COVID policy has similarly affected the global outlook by creating bottlenecks in international trade and adding to inflationary pressures. Estimates suggest that for 2022 global growth could slow to around 3.0%, and 2.2% in 2023 (OECD, 2022[3]; OECD, 2022[4]).

The impact of the war will vary across regions, depending on their ties to Russia and Ukraine, their main trading partners, their export basket, and their financial exposure. In Emerging Asia, the impact will likely be less acute, as the economic ties with the countries involved in the war are not very strong. Africa also has relatively small investment ties with Russia and Ukraine. Still, Russia’s large‑scale aggression against Ukraine will significantly affect its major trade and investment partners, along with the inflationary pressures already causing a food crisis. In LAC, the war can have diverse and significant impacts, although mostly indirectly through higher commodity prices, slow global growth, disruptions in trade, and financial volatility.

For the global economy, Russia’s invasion of Ukraine and the slowdown in China have at least three relevant channels of transmission

The first channel is an increase in energy and food commodity prices. Considering the importance of Russia in the global energy commodity market, Russia’s war against Ukraine pushed up prices amid pre‑existing supply and demand imbalances (Figure 1.1).

In the case of Russia’s war against Ukraine, geopolitical risk and uncertainty from the application of potential larger‑scale sanctions have fuelled volatility in global energy markets (Box 1.1). As a result of uncertainty, prices of oil, gas, coal and industrial metals soared in March 2022, and fluctuated around higher levels over the next few months. Energy prices have remained elevated, but a weaker demand from China has eased some of the pressures on metal prices (OECD, 2022[4]).

Beyond energy, the price of food raw materials has further risen due to the disruption of essential trading channels in the cereals and fertilisers segments. Ukraine and Russia contribute 30% of the wheat sold globally and are relevant corn, oats and sunflower producers. Belarus (Ukraine’s border country) and Russia are important exporters of potassium and phosphorus worldwide, minerals that are critical inputs to produce fertilisers used in multiple crops. The agreements that allowed some agricultural exports from Ukraine have helped to ease food price pressures (OECD, 2022[4]).

The increase in commodity prices will weaken the post‑pandemic economic recovery by accelerating inflation. Energy and food inflation directly affects the purchasing power of households, limiting private consumption spending, trade, and global growth as well as generating social tensions.

Figure 1.1. Commodity prices

December 2019 Index = 100

Note: Crude Oil BFO M1 Europe. Soybeans, No.1 Yellow USD/Bushel. LME‑Copper Grade A Cash USD/MT. Data accessed 7 October 2022.

Source: Thomson Reuters Datastream.

12 https://stat.link/8dmqka

Box 1.1. Could a total embargo on Russian oil shipments lead to a global economic crisis?

At the time of writing, the oil price had risen more than 20% since the Russian invasion of Ukraine, primarily driven by expectations of a drop in Russian crude availabilities rather than effective supply disruptions linked to sanctions. The current economic scenario is reminiscent of the oil crisis of 1973‑74 when the Organization of the Petroleum Exporting Countries (OPEC) decided to suspend the sale of crude oil to the United States for its military support to Israel during the Arab‑Israeli war. The price of oil quadrupled, causing inflation to rise sharply and central banks to raise interest rates sharply, giving way to a major global recession.

Although a Russian oil crash may have profound inflationary impacts, with severe effects on domestic demand on a global scale, it seems unlikely it will generate a global recession as the one observed almost half a century ago. This is due to the more efficient use of oil that the advanced economies of the West have developed, which translates into less dependence on this raw material. The global industry has a much lower dependence on oil than in the 1970s. In 1973, for example, the world used about one barrel of oil to produce USD 1 000 of gross domestic product (GDP) (2015 prices) (Ruhl and Erker, 2021[6]). In 2019, before the COVID‑19 pandemic, the intensity of oil use had fallen to 0.43 barrels by the same magnitude of global GDP (‑56%). Additionally, today there is a more diversified matrix of energy sources, where oil generates about one‑third of the world’s energy compared to 53% at the beginning of the 1970s, having ceded space to biofuels and nuclear reactors.

Another no less important element is the development of the fracking industry in the United States in recent years, which has allowed it to improve its oil trade balance. Thus, while harming consumer spending, an oil price shock such as the current one also benefits domestic producers. An energy matrix less dependent on oil and a broader range of producers makes the global economy less vulnerable to abrupt disruptions in crude oil supply and energy price shocks.

The second channel is the disruption of world trade. While, in general, the share of Russia and Ukraine in global trade and production is relatively small, they are critical suppliers of inputs to certain industrial value chains. Russia is one of the world’s leading producers of palladium (26% of global imports) and rhodium (7% of global imports), which are inputs for producing catalytic converters for automobiles. Ukraine supplies more than 90% of the neon used in making lasers used to manufacture American micro‑chips. Possible disruptions in the supply of these raw materials could aggravate the supply of semiconductors for the electronic equipment and car industries, worsening the critical shortages observed in these sectors since the beginning of the pandemic. Similarly, Russia and Ukraine together account for about 30% of global exports of wheat, 15% of corn, 20% of both mineral fertilisers and natural gas, and 11% of oil. In the case of China, trade disruptions have arisen as a result of the impact of the strict zero‑COVID strategy. In Shanghai and other big cities, the policy has created labour shortages, which affects transport capacity, slows operations in ports and reduces air traffic (OECD, 2022[3]).

The third channel is an increase in financial volatility. Since Russia’s large‑scale aggression against Ukraine, global capital markets have experienced high volatility, with an initial plunge on 24 February 2022 and a rebound in the following weeks. The Chicago Board Options Exchange Volatility Index, a proxy of the standard market volatility in international capital markets, reached its highest peak of 2022 in March and has remained relatively high, although still considerably below the volatility seen in 2020 due to the COVID‑19 outbreak. Overall, the impacts of Russia’s war against Ukraine and China’s economic slowdown on global capital markets have been more moderate than the pandemic’s. However, as central banks have responded to above target inflation rates, financial conditions have tightened and capital outflows from emerging market economies have intensified (OECD, 2022[4]).

Central banks are reacting to growing inflationary pressures not seen in decades

One of the main economic policy challenges of Russia’s war against Ukraine is soaring commodity prices, further fuelling inflation. Disruptions in global supply chains, high freight costs, and demand and supply imbalances contributed to the build‑up of inflationary pressures not seen in decades. China’s zero‑COVID policy can add to inflationary pressures via producer prices (OECD, 2022[3]; OECD, 2022[4]).

Central banks in major economies initially assessed this rise as transitory. However, it has persisted much longer than originally anticipated by authorities, leading to an unexpected global inflationary scenario. In the United States, inflation reached 8.6% year on year in March 2022 – a 40‑year high. For some advanced economies, May 2022 had the highest level of inflation. This was observed in the Eurozone, with inflation reaching around 8.0%, Canada (around 7.7%) and the United Kingdom (above 9.0%), where headline and core price growth has already far exceeded the respective official inflation targets.

The main risk of this prolonged deviation of inflation from the target is the de‑anchoring of medium‑ and long‑term inflation expectations. Central banks in developed economies are accelerating the speed of monetary policy normalisation by reducing asset purchases and increasing interest rates from historical minimum levels.

The first major central bank to move forward with interest rate normalisation was the Bank of England, raising its benchmark rate from 0.10% to 0.25% in December 2021 and it has since then increased it up to 1.75%. In March 2022, the US Federal Reserve began its cycle of interest rate hikes, applying the first increase of the Fed Funds Rate in four years, from 0.50% to 0.75%. Raising interest rates has continued. In June and September 2022, the US Federal Reserve approved hikes of 0.75 basis points up to 2.37, the largest since 1994 (OECD, 2022[4]).

The European Central Bank (ECB) has also been taking measures towards monetary normalisation, mostly as this region is more directly exposed to Russia’s war against Ukraine. In March 2022, the ECB announced that the pandemic emergency purchase program would come to an end and that it would gradually reduce its debt purchase until the end of June. In July 2022, the ECB raised its key interest rate by half a percentage point, the first increase in over a decade. Similarly, it implemented the Transmission Protection Instrument (TPI) to ensure that the monetary policy stance is transmitted smoothly across all euro area countries.

Although many emerging economies, particularly in Latin America, have advanced in the withdrawal of monetary COVID‑19 stimuli since last year, emerging markets will face challenges as interest rate hikes continue in advanced economies. Higher interest rates may pose risks to highly indebted households and companies, compromising the banking sector (IMF, 2022[5]). Moreover, following the pandemic‑related sharp increase in public debt, higher interest rates could threaten sustainability, particularly in countries experiencing lower growth.

The recovery in Latin America is slowing down, reflecting low potential growth

LAC had a strong rebound in 2021. GDP growth in LAC rebounded to above 6% in 2021, driven by fiscal stimulus, more favourable external conditions and the acceleration of the region’s vaccination campaigns, which allowed the economies to reopen. This happened after the region registered one of the most severe output contractions (6.9%) globally in 2020, causing poverty and inequality to rise. However, the recovery was uneven. While several countries regained pre‑pandemic GDP levels, decreasing tourism flows and limited fiscal space for stimulus constrained a fuller comeback in the Caribbean and Mexico (ECLAC, 2022[1]).

In 2022, a slowdown in LAC growth is expected as external conditions deteriorate, reopening effects dissipate, and local authorities roll back fiscal and monetary stimuli. The rapid convergence to modest expansion rates reflects low potential growth. Projected economic growth in the region will be insufficient to revert the increases in poverty and inequality accentuated by the pandemic. Inflationary pressures have prompted central banks to increase interest rates since 2021, and the tightening cycle will continue while inflation rates remain above central banks’ targets. Fiscal deficits will narrow in 2022 as governments withdraw spending and activity stabilises. However, debt levels will remain high, and further consolidation efforts might be needed in the medium term to recover fiscal space and debt sustainability. Risks to this outlook stem from a steeper and faster‑than‑anticipated tightening of financial conditions, new waves of the pandemic, longer‑lasting disruptions in global supply chains, political uncertainty in the region, and the repercussions of both Russia’s invasion of Ukraine and China’s economic slowdown.

Potential growth, a pre‑pandemic structural challenge in LAC, remains stagnated at low levels. Moreover, regardless of how potential growth is calculated, it has weakened. Potential GDP per capita growth has been below 1% since 1980, slightly increasing following the commodity boom (between 2003 and 2013). Since then, per‑capita potential output growth has stagnated. Furthermore, potential GDP per capita growth remains below advanced economies, hindering convergence. Over the last decades, the per‑capita GDP gap between LAC and advanced economies has narrowed, but gains stopped after 2015 as potential regional output faltered (Figure 1.2).

Notes: AR = autoregressive model, which uses GDP per capita growth data. The number of lags (1 and 2) was determined by analysing the autocorrelation function and choosing the model that maximised the log‑likelihood. HP = the Hodrick‑Prescott filter, which was used as an alternative model due to its resilience to short‑term shocks to create a smoothed curve (lambda 100). The LAC series refers to the 33 countries covered by the IMF’s World Economic Outlook database, October 2022.

Source: Authors’ calculations based on (IMF, 2022[5]).

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Overall effects on LAC of Russia’s war against Ukraine and China’s slowdown remain uncertain and are transmitted through three main channels

The first channel is the effect of higher commodity prices on external accounts. The reduced exposure to Russia and Ukraine limits the direct impact on trade in the LAC region, which does not exceed 1% of the region’s total trade. Only Ecuador (4% of total trade) and Paraguay (8% of total trade) exhibit a more significant exposure to trade with Russia. From the point of view of investment flows, Russia’s involvement in the region is shallow, except for participation in some energy projects in Brazil and Mexico. Therefore, the main impact of the crisis on the LAC region is through the terms of trade because of increases in the prices of energy and some agricultural raw materials.

The outcome depends on whether countries are net exporters or importers of energy and food. Net exporters in South America benefit from more favourable terms of trade, improving current account balances, and generating additional fiscal revenues that may stimulate demand and, consequently, growth and employment. Nonetheless, the improvement in the terms of trade may not be significant because of the accumulated increases in imported input prices due to the disruptions in global supply chains. Central American and Caribbean countries experience the opposite effects (Figure 1.3, Panel A). Similarly, the economic slowdown experienced by China and globally affects the trade channel, particularly in economies such as Brazil, Chile, Peru and Uruguay, where

China is a crucial trading partner. Negatively affected countries, such as Chile, Panama, Paraguay and Peru, have sufficient international reserves to face the transitory negative shock (Figure 1.3, Panel B) and maintain access to global financial markets at relatively low costs.

Foreign direct investment (FDI) is essential to finance current account deficits and the green transition. FDI inflows experienced a 56% increase in 2021 (reaching USD 134 billion) after the substantial fall (45%, USD 86 billion) experienced in 2020 (UNCTAD, 2022[7]). Quality FDI can contribute to increasing productivity and deliver a more sustainable recovery and attain decarbonisation goals (OECD, 2019[8]; OECD, 2021[9]; OECD et al., 2021[10]). In terms of decarbonisation and similar to the OECD, FDI on renewable energy reached its peak (both in USD and number of projects) in 2019 and has not yet recovered. Nevertheless, it remains above the pre‑2019 levels. In LAC, FDI on renewables remains above the levels invested in oil coal and gas (both in USD and number of projects) (Figure 1.4).

1.4. LAC and OECD FDI investment in renewable energy and in coal, oil and gas, LAC

Notes: Countries included are Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, Saint Lucia, Suriname, Trinidad and Tobago, Uruguay, and Venezuela.

The second channel of transmission is through international financial markets. In addition to the shock in markets generated by the Russian war against Ukraine, other factors including the normalisation of monetary policy in advanced economies, and specific domestic aspects within LAC countries affected capital markets’ behaviour. Between March 2022 and October 2022 risk premia increased, although they remain below the levels seen during the COVID 19 pandemic. Similarly, during the same period, most local currencies have depreciated (Figure 1.5), with the exception of some economies such as Mexico where it has appreciated. Exchange rate depreciations in most LAC countries follow a trend that precedes the war, and recently is a combination of domestic and external factors, including increases in inflation rates.

The third channel is the intensification of inflationary pressures. First, the pandemic and its recovery disrupted trade and caused supply bottlenecks, input shortages and increases in transport costs and commodity prices (IMF, 2022[11]). In addition, the war has exacerbated the rise in commodity prices in most LAC countries. As a result, inflation in 2022 has been above the policy target in LAC economies (Figure 1.6, Panel A). In Chile for instance, inflation has risen to a 30 year high (OECD, 2022[12]). Before Russia’s war against Ukraine, the price rise (Figure 1.6, Panel B) had already prompted central banks across LAC to increase interest rates to anchor expectations. As inflationary pressures mount due to the increase in commodity prices, and the US Federal Reserve hikes rates, this process will be difficult to reverse. The marked rise in energy and food prices reduces the purchasing power of households, particularly the more vulnerable, still reeling from the effects of the pandemic. This does nothing to reverse the increase in poverty and inequality in the region, already hampered by the projected weaker economic growth.

Monetary policy should consider and align with climate goals and policies. Different climate policies have distinct implications for the price system, for instance a fixed carbon price can affect price fluctuations (Chen et al., 2021[13]). Similarly, incorporating environmental, social and governance (ESG) factors into central bank mandates will be critical to efficiently safeguarding price and financial stability given the high‑level impact that climate risks could have on the traditional core responsibilities of this institution. Central banks in LAC can share and learn from experiences with other central banks. The ECB aims to monitor the financial system, including private banks, so that the risks from climate change are included (ECB, 2021[14]).

Note: Data are from January to August 2022 (Panel A) and from January 2021 to September 2022 (Panel B).

Low fiscal space to navigate the challenging context

To cope with the COVID‑19 crisis, public expenditure in LAC reached a historic high of 13.6% of GDP in 2020 at the central government level, an increase of 2.3 percentage points compared to 2019. This level was even higher than that seen during the last economic crisis in 2008, when the increase was 1.1 percentage points (ECLAC, 2022[2]). Social spending is the main component of total public spending (ECLAC, 2022[2]). The countries that stand out for the largest increases in 2020 (with respect to 2019) are Brazil and El Salvador (5.3 percentage points of GDP) and Argentina, Barbados and the Dominican Republic (between 4.2 and 4.6 percentage points of GDP) (ECLAC, 2022[2]).

In 2021, LAC economies started to withdraw the fiscal stimulus and revenues increased with the economic recovery; therefore, primary fiscal deficits for the central government have been narrowing. On average, deficits reduced to 4.2% of GDP in 2021, an improvement of 2.7 percentage points from 2020. Tax revenues increased in 2021 thanks to strong GDP growth, while spending fell as LAC economies reduced emergency transfers (ECLAC, 2022[15]). This came after a drop in tax revenues of 0.8 percentage points in 2020 relative to 2019. The COVID‑19 pandemic resulted in historic falls in both nominal tax revenues and nominal GDP, with taxes falling more sharply than nominal GDP. There is still some fiscal stimulus related to the pandemic, as current expenditure remains above 2019 levels (IDB, 2022[16]; OECD et al., 2022[17]).

Even though the 2021 recovery helped relieve some of the pressure on fiscal accounts, structurally tight fiscal space in LAC still needs to be addressed. Public debt‑to‑tax ratios, a proxy indicator of countries’ financial capacity to pay for public debt, were higher in 2019 than in 2013 and increased significantly in 2020 (Figure 1.7).

Tax revenues remain low in LAC. In 2020, the average tax‑to‑GDP ratio was 21.9% of GDP compared to 33.5% in the OECD. As a result, the gap between the LAC and OECD tax‑to‑GDP ratios widened to 11.6% of GDP in 2020 from 10.7% in 2019 (OECD et al., 2022[17]). The gap is mainly explained by the region’s low revenues from income taxes and social security contributions relative to the OECD average. The combined share of taxes on income and profits (especially personal income taxes) and social security contributions was much lower in the LAC region than in the OECD (44.1% versus 60.0% in 2019, on average).

Figure 1.7. Gross public debt‑to‑tax ratio in selected Latin American countries

After a substantial increase in 2020, LAC debt declined in 2021. Debt stood at 53.7% of GDP in 2021, below the 56.5% registered in 2020 (ECLAC, 2022[15]). The economic recovery and rising inflation helped reduce debt, despite fiscal deficits. Notwithstanding, volatility in the financial markets, rising debt costs, and the need to finance the green transition highlight the necessity for adequate, proper fiscal frameworks (including fiscal rules) and globally co‑ordinated debt management under key guidelines (Chapter 4) (OECD et al., 2021[10]; Arreaza et al., 2022[19]).

Going forward, LAC economies must support economic conditions and fiscal sustainability, particularly in the face of rising food inflation, financing the green transition, while protecting the most vulnerable through strengthening social protection systems. The composition of the fiscal consolidation, the timing and the balance between capital and current expenditure will play important roles in the shape and inclusiveness of the recovery. If public investment is safeguarded, relative to current expenditure, it can neutralise the contractionary effects of fiscal adjustment in the short run and might stimulate growth in the medium term (Ardanaz et al., 2021[20]). In the short term, the focus should remain in protecting the most vulnerable against rising inflation.

With a tight fiscal space and with high debt levels, countries in the region will need to face the growing negative effects of climate change and finance the green transition. Fiscal efforts should develop comprehensive frameworks that combine decarbonisation and resilience strategies with the promotion of growth and social inclusion (D’Arcangelo et al., 2022[21]).

Natural disasters weigh heavily on fiscal sustainability

Climate change is already challenging fiscal sustainability when natural disasters strike. The frequency of natural disasters in the region has increased over the last decades. An average of 17 hurricanes per year and 23 category‑5 hurricanes in total were recorded between 2000 and 2019, mostly affecting Caribbean and Central American countries (OCHA, 2020[22]).

Other natural disasters, such as floods, wildfires and droughts, are common in LAC. They have severely affected the whole region, with flooding and wildfires being the most common events in South America’s Southern Cone. Drought affects the largest number of people in the region, with crop yield reductions in 2018 of between 50% and 75% in eastern El Salvador, central and eastern Guatemala, southern Honduras, and parts of Nicaragua (OCHA, 2020[23]). In 2022, the Southern Cone, traditionally a global pantry for both grains and meat, continues to be hit by severe levels of drought. This has led to a decrease in agricultural productivity, as well as widespread food security concerns (Amaya, 2022[24]). In turn, this has negative effects on GDP of most countries in the region (Banerjee et al., 2021[25]), on their fiscal accounts, and on the most vulnerable (Chapter 2) (Bárcena et al., 2020[26]).

The economic cost of the impact of each natural disaster depends on the level of development of the country, which is also related to its level of preparedness and capacity to respond to natural disasters. On average, a natural disaster results in an increase in the fiscal deficit of 0.3% of GDP for upper‑middle‑income countries, 0.8% for lower‑middle‑income countries and 0.9% for low‑income countries. The main negative impact is concentrated in a drop in fiscal revenues as a result of the fall in GDP. For lower‑middle‑income and low‑income countries, this reduction in public revenues is equivalent to 0.8% and 1.1% of GDP, respectively (Alejos, 2021[27]). The size of the government’s reaction in the event of a disaster depends not only on the severity of the disaster but also on the government’s rate of compliance in meeting its liabilities – that is, its ability and willingness to meet or exceed its ex‑ante commitments to shoulder specific disaster‑related costs (OECD/The World Bank, 2019[28]).

The effects of fiscal deficits can be specifically harmful to economies with tight fiscal space and can leave long‑term scars on fiscal accounts. Natural disasters can lead to dramatic increases in public debt, the abandonment or postponement of new investment projects, and the procyclicality of fiscal policy, especially for countries that do not have adequate insurance mechanisms for natural disaster risks (such as catastrophe bonds or disaster insurance) (Chapter 4) (IDB, 2021[29]). It is also important to consider that similar negative fiscal effects can be caused by the concentration of multiple non‑extreme events in a short period, especially when there are conditions of high exposure and vulnerability in the country.

Some Caribbean economies present the highest levels of indebtedness: in 2020, nearly three‑quarters of small states with unsustainable debt levels were in the Caribbean. Natural disasters, alongside poor economic performance, insufficient fiscal restraint and high financing costs in capital markets, are the main reasons for these high debt levels. The cost of debt service for these economies greatly reduces their fiscal space and undermines their ability to react to further shocks and to fund the necessary public services and public investment to drive their development process (OECD et al., 2021[10]).

LAC will need to diversify its tax revenue to compensate for the coming fall in public revenues from hydrocarbons in main producing economies

As the world transitions to clean energy sources, demand for non‑renewable resources will decline, entailing a drop in public revenues in a group of LAC countries that export hydrocarbons. As alternative technologies become cheaper, and measures to address climate change and implement the Paris Agreement are put in place, demand for oil is expected to fall (IDB, 2021[29]). Before Russia’s war against Ukraine, it was estimated that, in scenarios that meet the Paris Agreement targets, oil production in LAC needed to fall by 60% by 2035, which would entail losing about USD 3 trillion in tax revenue (Solano‑Rodríguez et al., 2019[30]; Vogt‑Schilb, Reyes‑Tagle and Edwards, 2021[31]). Similarly, the role that natural gas plays in the region’s economy will be progressively reduced, leaving half the reserves untapped and reducing associated tax revenues by up to 80% (Welsby et al., 2021[32]).

This phasing out among major hydrocarbon producers will have significant negative effects on fiscal revenues and on foreign exchange. Hydrocarbons are a major generator of foreign exchange, with its exports accounting for one‑third or more of total exports in several countries. Concerning fiscal revenues, the exploration and production of oil and gas account, on average, for around 3% of GDP (Figure 1.8, Panel A). This can reach above 15% of total revenues in Bolivia, Mexico, and Trinidad and Tobago and 24.2% in Ecuador (Titelman et al., 2022[33]). These revenues can excede, on average, 3% of GDP and in some cases more than 7%, as in Ecuador and Trinidad and Tobago (Figure 1.8, Panel B) (OECD et al., 2022[17]). If the decline in hydrocarbon revenues is not offset by an increase of those from other sources or economic diversification, these countries will experience large fiscal deficits (Titelman et al., 2022[33]).

Note: For Panel A the series refers to the average of the countries presented in Panel B. Source: (OECD et al., 2022[17]).

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Stranded assets can be an additional cost of inaction against climate change

As climate policies progress in the region and the phasing out of fossil fuels makes headway, hydrocarbon reserves and infrastructure are at risk of becoming stranded assets, resulting in financial losses for LAC economies.

Many economies in the region continue to develop new oil and gas projects that risk ending up as stranded assets. For instance, Argentina, Brazil and Mexico have ambitious plans to increase hydrocarbon production; others, such as Guyana, have plans to start exploiting it on a scale transformative for their economies (IEA, 2017[34]). If all planned fossil fuel power plants were built, there would be a 150% increase in the region’s “committed emissions” (IDB, 2021[29]). In addition, ten coal‑based power plants were inaugurated in the last decade, illustrating how, between 2009 and 2016, countries were still choosing coal‑based thermal power over other cleaner options, such as solar, wind or hydro (Bermúdez, 2020[35]).

Some types of stranded assets will represent higher costs. For instance, coal technologies are expected to make up a small percentage of the total capacity stranded in the LAC region. Still, the cost associated with the stranding of these assets is the highest. This is because they are more capital‑intensive than gas and oil plants and are assumed to have longer lifetimes (60 vs. 45 years) and thus a lower depreciation rate (Binsted et al., 2020[36]).

Economies in the region that are more advanced in their transition to low‑carbon energy production are already closing coal‑based plants. For instance, in Chile, since the Decarbonisation Plan was announced in 2019, 6 coal‑based thermoelectric plants have closed. Another 5 will close by the end of 2024, and the remaining 17 will close before 2040 (Parra, 2021[37]).

Spending decisions should consider the effects of climate change and the green transition

LAC must close its investment gap by allocating more resources in infrastructure to increase resilience and achieve its decarbonisation goals. The region already falls behind in terms of investment. In 2021, it invested around 19.5% of GDP, below the 22% invested in advanced economies and the 39% invested in Emerging and Developing Asia (IMF, 2022[5]). To achieve the United Nations Sustainable Development Goals (including resilience and decarbonisation goals), the region will need to increase its investment in infrastructure by about 5% of GDP (Galindo, Hoffman and Vogt‑Schilb, 2022[38]). Despite the need for high investment, the region must continue to balance between capital and current spending, using the momentum to finance the green transition.

LAC must invest more to become more resilient against the negative effects of climate change. Climate change increases the frequency of natural disasters and causes changes in precipitation and temperature, along with coastal flooding. The current infrastructure of the region can be vulnerable to these events. New energy, transport, water or telecommunications projects must envisage the risk that these events pose. Moreover, existing infrastructure must be made resilient to these events, while new infrastructure must be created to reduce their effects (e.g. flood control dams, floodwalls or water dams to preserve and redistribute water to zones experiencing droughts). It is estimated that, for every USD 1 invested in making infrastructure and economies more resilient, USD 4 is avoided in impact costs (Galindo, Hoffman and Vogt‑Schilb, 2022[38]). Similarly, the region could explore the role of nature based solutions (NbS) in limiting and managing the current and future impacts of climate change. NbS are measures that protect, sustainably manage or restore nature, with the goal of maintaining or enhancing ecosystem services to address a variety of social, environmental and economic challenges (OECD, 2020[39]).

Although the investment required to achieve resilience is high, spending reallocation and early planning can help reduce costs. Climate strategies are important for anticipating long term objectives in government planning, managing risks appropriately and greening public spending. To achieve carbon neutrality and climate resilience in 2050 a multi sectoral climate strategy is needed, that aligns all sectoral strategies and incorporates decarbonisation and resilience criteria into public investment and budget systems (Galindo, Hoffman and Vogt‑Schilb, 2022[38]).

Alongside the correct infrastructure, financial frameworks that manage climate‑related risks and increase financial resilience are needed. LAC economies must develop frameworks that can manage national risks while promoting global climate financial resilience. As such, frameworks that identify risks and better understand them in terms of their components (hazards, exposure and vulnerability) and sources can play a key role, mitigating financial losses through risk reduction.

Despite best efforts, risk will always remain. Thus, coherent and integrated multipronged government financial strategies must be put in place (OECD, forthcoming[40]). Examples to minimise risk include improved building codes, better territorial and watershed planning, analysis of the budgetary impact of risk, and financial preparedness, including the use of insurance and reinsurance financial instruments (Galindo, Hoffman and Vogt‑Schilb, 2022[38]). It is also necessary to scale up investment towards financial instruments such as green, social, sustainable and sustainability‑linked bonds (GSSS Bonds) within internationally aligned frameworks that include green standards and sustainable taxonomies (Chapter 4). These will allow for increased and more effective redirection of spending towards sustainable projects that contribute to climate change mitigation and adaptation. Additionally, as some adaptation measures are costly, governments must carefully evaluate the ex‑post impacts and the probability of disasters occurring. Post‑disaster loss assessment can provide qualitative and quantitative information to help identify the strengths and weaknesses of risk assessment.

If fiscal policy is to be effective, it must be through co‑ordinated efforts

For any fiscal policy or reform to be effective, it must co‑ordinate tax, spending and debt policies, considering the socio‑economic and political context through well‑defined sequencing of actions. It also needs to be backed by a broad consensus, built through national dialogue and clear communication (Chapter 5). The political economy of fiscal policy is more important than ever (Nieto‑Parra, Orozco and Mora, 2021[41]).

Moreover, a fiscal sustainability framework focused on strengthening public revenues will be required to ensure the viability of a growing green expenditure trajectory. In the short term, the region will have to focus on reducing tax evasion (6.1% of GDP in 2018) and on reviewing tax expenditures (ECLAC, 2021[42]). It will also be key for countries to align their tax codes with new international best practices and to strengthen tax frameworks applied to the extractive sector (Titelman, 2022[43]). In the medium term, the region will have to focus on generating more progressive and greener fiscal pacts, with the aim of increasing tax collection and strengthening direct income and property revenues. It will also need a fully‑fledged redesign of hydrocarbon taxation and subsidy policies (Chapter 4) (Titelman et al., 2022[33]). Additionally, to guarantee a just transition it will require public investments that attract green private investment (crowding‑in); generate direct tax incentives towards renewable energies and decarbonisation, digital inclusion, and research and development; and lay the foundations for universal social protection systems (Chapter 4) (Titelman, 2022[43]). In terms of green tax incentives, special attention must be given to their design in relation to policy objectives. If misused, they can reduce revenue‑raising capacity; create economic distortions; erode the principle of equity; increase administrative and compliance costs; and potentially trigger harmful tax competition and windfall gains to investors for projects that would have taken place in the absence of the incentive (Celani, Dressler and Wermelinger, 2022[44]).

Social conditions remain worse than before COVID‑19

Poverty and extreme poverty in LAC remain above pre‑pandemic levels. By 2022, ECLAC estimated that 33% of the population would be in poverty, and 14.5% would live in extreme poverty as a consequence of limited economic performance and increasing inflation (ECLAC, 2022[1]). Poverty rates in 2022 are the highest since 2008, before the global financial crisis. After the strong increase in 2020 due to the COVID‑19 crisis, poverty slightly receded in 2021 due to the strong rebound (Figure 1.9). However, low economic growth and rising inflation in 2022 reversed these small gains. Extreme poverty has steadily increased every year since 2014 – even in 2021, despite the strong rebound (ECLAC, 2021[45]; ECLAC, 2022[1]). The rise of poverty and extreme poverty is a result of massive losses of jobs and livelihoods, low potential growth, high inflation rates, lack of sufficiently strong social protection systems and, in some countries, reduction in emergency income transfers that was not offset by the expected increase in employment income (ECLAC, 2021[45]; OECD et al., 2021[10]; OECD, 2022[12]).

Since the pandemic, there has also been a generalised impoverishment of much of the population in Latin America, which has translated into downward mobility. This means that, since 2020, the low and lower middle‑income strata’s share of the population has increased, to the detriment of that of the upper middle‑ and high‑income strata. With the recovery measures and economic upturn in 2021, there was a clear improvement in the middle classes, which regained some of their income. Still, the situation for low‑income and low‑middle‑income classes worsened, and extreme poverty increased (ECLAC, 2022[2]).

Figure 1.9. Poverty and extreme poverty rate evolution

Emergency cash transfers are key to offsetting the negative effects of the pandemic and external shocks on employment income and, therefore, to addressing poverty. However, in most countries, these are not enough to curb the increase in poverty. For instance, compared to the previous years in most countries in the region, the increase in the total income of households that received transfers in 2020 was smaller than the fall in their labour income. The notable exception was Brazil, where the fall in labour income represented a loss in the total income of about 4%, while transfers were equivalent to an increase in the total income of 7% (ECLAC, 2022[2]).

Poverty is heterogeneous not only among countries in the region but also among population groups. Across all countries, the trend shows that women aged 25 to 39 have higher poverty rates than men of the same age. Likewise, poverty rates can be 1.3 to 1.8 times higher for people under age 15 than for the next age group (ages 15 to 39). Additionally, the largest gaps are found in countries with low poverty rates, such as Brazil, Chile, the Dominican Republic and Uruguay. In countries where the incidence of poverty is higher, the gap between age groups tends to narrow (ECLAC, 2022[2]).

Informality remains a key challenge to tackling poverty and extreme poverty. In LAC, both informal and mixed households account for two‑thirds of the total population. On average, almost half (45.3%) of people in LAC countries live in a household that depends solely on informal employment, 21.7% live in households with formal and informal workers (mixed households), and the remaining 33.1% live in completely formal households. In Bolivia, Honduras and Nicaragua, more than 60% of households rely entirely on informal employment, making them especially vulnerable to shocks such as the COVID‑19 crisis (Figure 1.10) (OECD, forthcoming[46]).

Source: (OECD, forthcoming[46]).

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Having a perspective on household informality is key to bringing about new policy insights, as the informality status of working members within a household has implications for its dependent members, and indicates the various vulnerabilities to which they are exposed. Such insight is also key to analysing the opportunities that the green agenda will bring to create new high‑quality formal jobs in LAC (Chapter 3) (OECD et al., 2021[10]; OECD, forthcoming[46]). This is also the case for analysis that links informality with the structural axes of the social inequality matrix in the region, including a territorial perspective of informality, as this is not a phenomenon evenly distributed within countries (Abramo, 2022[47]; Espejo, 2022[48]). It is crucial that strategies to reduce informality, including those connected to a green transition, take its diverse expressions into account.

Although the slow trend of inequality reduction was reversed in 2020, cash transfers prevented a larger increase than occurred

Inequality in income distribution has also increased in most countries in the LAC region. In 2020, the deterioration in distribution affected the poorest sectors the most, halting the trend of falling inequality that had been slowing down since 2002 and had lost pace since 2010. The Gini coefficient for the Latin American average went from 0.54 in 2002 to 0.46 in 2020, with very slight reductions from 2010 onwards. Countries demonstrating among the highest inequality coefficients in 2020 included Brazil, Colombia and Panama, with averages above 0.50. The lowest coefficients occurred in countries including Argentina, the Dominican Republic and Uruguay, with an index of 0.40. A comparison of the situation in 2017 with that prevailing in 2019 and 2020 shows that inequality, as measured by the Gini coefficient, increased in nine countries and decreased in six (ECLAC, 2022[2]). The distributional deterioration affected the poorest segments of the population the most (ECLAC, 2022[2]).

To better explain the evolution of changes in inequality among countries, it is necessary to refer to the evolution of average household income. Although there was a decrease in total average, the determining differential factor is the way in which the losses were distributed. In countries where inequality increased, the better‑off quintiles lost less than the poorest. In this sense, the fall in income for the poorest quintile was on average 3.2 times the reduction in total income for the richest quintile. Thus, the wage income of the poorest quintile collapsed on average by 39.4%, which represents 5.1 times the decline in wage income experienced by the richest quintile (‑7.8%). In contrast, in countries where inequality decreased, the richest quintile contracted the most. (ECLAC, 2022[2]). Emergency cash transfers also contributed to the reduction of inequality. The transfers implemented by states specifically to respond to the drop in income caused by the COVID‑19 pandemic were essential in preventing a further increase in inequality. The Gini coefficient would have increased on average by 4% without them, compared to the actual increase of 1% in Bolivia, Costa Rica, Ecuador, Paraguay, Peru and the Dominican Republic. Similarly, in these countries the Atkinson index would have increased to 13.8% without them, compared to its actual growth of 5.1%. (ECLAC, 2022[2]). In other economies, such as Chile, inequality actually dropped from 0.45 in 2020 to 0.39 in 2021 thanks to the import support policies (OECD, 2022[12]).

Strengthening social protection systems will be key to protecting the population

The implementation of social protection measures in response to the pandemic have been central to the welfare of the population but has also highlighted areas for improvement. During the last 15 years, countries in Latin America and the Caribbean have expanded the coverage of both contributory (financed by wages) and non‑contributory (financed by taxes) social protection schemes (OECD et al., 2021[10]; ECLAC, 2022[2]).

While significant progress has been made in building social protection systems, many informal workers remain often excluded from it (OECD et al., 2021[10]; OECD/ILO, 2019[49]; ECLAC, 2022[2]). More than half of the workers in the region do not participate in any contributory social security system against risks related to illness, unemployment, and old age (ILO, 2018[50]). On average, in the LAC region, more than 60% of economically vulnerable and informal workers do not benefit from labour‑based social protection or a social assistance programme (OECD et al., 2021[10]). Despite their lower incomes and greater need for protection, informal workers often fall through the cracks of social protection systems, making many incomes insecure or vulnerable to income poverty affecting their families. Thus, it is fundamental that countries advance towards universal, comprehensive, sustainable and resilient social protection systems (ECLAC, 2022[2]).

Individuals and households in LAC, have a long tradition of informal networks of mutual support to cope with risks and uncertainty, especially in contexts where public options are absent or limited like in rural areas. Informal support is often organised around lifecycle or livelihood risk and vulnerability. Private transfers received from friends, relatives and other households are another element of this form of inter‑household informal protection. Around the mid‑2010s the share of private transfers in household income varies from 4% in Bolivia and Honduras to around 15% in Costa Rica (OECD/ILO, 2019[49]). However, relying on informal ties or mechanism for protection has several limitations and strong, public social protection systems are essential as part of a social contract to advance towards the exercise of economic and social rights. In the absence of universal access to social protection and social security policies, studies suggest that informal risk‑sharing mechanisms are close to efficiency when it protects from idiosyncratic shocks linked to individuals, households, or lifecycle events, such as illness or death. They may fall short when it comes to broader shocks that affect a wider geographical area, such as a neighbourhood or community, which is likely the case for health environmental risks and the broad changes brought by green agendas. This can particularly hurt poorer households, which are already financially constrained (Watson, 2016[51]). It is therefore crucial to strengthen social protection systems that are universal, comprehensive, sustainable and resilient, and which can progressively expand coverage to informal workers, ensuring a green and just transition for all (OECD/The World Bank, 2020[52]; ITF, forthcoming[53]; OECD, 2021[54]; ECLAC, 2021[59]).

Regarding the contributory scheme, some Latin American countries have extended its coverage to informal economy workers. Reasons for success include several measures, such as combining the support for the formalisation of enterprises with access to social protection schemes; extending statutory coverage to previously uncovered workers; adapting benefits, contributions and administrative procedures to reflect the needs of informal workers; and subsidising contributions for those with very low incomes. In addition, several countries expanded the fiscal space needed to scale up social protection programmes financed through general government revenues. These efforts have significantly contributed to building social protection floors that guarantee universal health coverage and at least basic income security throughout the lifecycle, for instance through tax‑financed pensions, disability benefits, child benefits, maternity benefits or employment guarantee schemes (OECD et al., 2021[10]) (Chapter 3).

Regarding the non‑contributory scheme, according to official information, between 1 March 2020 and 31 October 2021, 33 countries in LAC adopted 468 non‑contributory emergency measures and other support measures. These included three types: 1) monetary transfers; 2) in‑kind transfers (including the provision of food, medical and education materials, as well as support for labour and productive inclusion); and 3) securing and facilitating access to basic services (water, energy, telephone and Internet) (ECLAC, 2022[2]). There were also measures aimed at containing and reducing household expenses, through tax relief, price setting and control for basic goods, and rents and payment facilities (Brooks, Jambeck and Mozo‑Reyes, 2020[55]). While most of these measures were put in place in 2020, given the prolongation and depth of the economic and social consequences of the pandemic, it has been necessary to extend some measures or implement new ones (ECLAC, 2021[45]).

Going forward, it will be necessary to strengthen social protection systems (not only by increasing coverage but also by improving co‑ordination and interoperability), make them more flexible against different types of shocks, ensure that they have positive long‑term effects and improve their functioning while guaranteeing that they are properly funded.

Social protection schemes or cash transfers should have long‑term development goals. Along with guaranteeing adequate levels of income, these goals could be promoting just, green education, labour or formalisation outcomes. For instance, there is evidence that targeted cash transfers, especially conditional, can spur investment in child schooling (OECD et al., 2021[10]; OECD, 2019[56]). Similarly, payments for environmental services can encourage a long‑term change in behaviour to prevent future ecosystem degradation (Porras and Asquith, 2018[57]). A good example is Peru. Between 2014 and 2018, the Ministry of Environment and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) developed conditional cash transfers to stimulate community protection of tropical forests in the Amazon region. To date, 188 indigenous communities have been covered, and over 1 800 000 hectares (ha) of tropical forest have been placed under protection. The conditional cash transfers are benefiting indigenous families, which have been able to improve their income levels and livelihoods without endangering their forests. Sustainable development skills are also being developed, as beneficiaries are advised on how to use the conditional cash transfer to initiate and manage projects and to monitor forest conversion (deforestation) (GIZ, 2014[58]).

Governments must also improve the flexibility of non‑contributory programmes with strategies that provide protection against different types of shocks, for example natural disasters in some cases exacerbated by climate change. Such programmes should complement existing strategies and programmes that focus on structural poverty with others that ensure income support in the face of systemic (or idiosyncratic) shocks. Social protection must therefore articulate and co‑ordinate with disaster management, with a view to increasing social and institutional resilience in order to cope with the impacts of increasing disasters and allow for a transformative recovery that is equitable (ECLAC, 2021[59]). Hence, responsive social assistance programmes should be promoted so that countries can adapt quickly to contingencies and find flexible ways to respond to the needs of individuals and households affected by shocks. These are also key in preventing shocks from systematically translating into persistently higher levels of poverty and inequality (Stampini et al., 2021[60]).

Countries must address the most pressing challenges affecting the functioning of their social protection systems. Efforts include, among others: enhancing information systems and digital platforms to better identify potential recipients and participants; increasing levels of coverage and updated information; improving the institutional framework, considering the various territorial levels working towards a unified social registry, and improving the level of interoperability; improving electronic payment systems; and making income support programmes more sustainable (Stampini et al., 2021[60]; Berner and Van Hemelryck, 2021[61]; Alvarez et al., 2021[62]). Additionally, the COVID‑19 crisis highlighted the need to improve co‑ordination and interoperability among the labour, health and education systems to enhance countries’ overall social protection systems (Cabutto, Nieto‑Parra and Vázquez‑Zamora, 2021[63]; IPCC, 2022[64]). It is important to build on the advances in sectoral co‑ordination that were consolidated during the pandemic, since they positively influenced the unequal distribution of the social determinants of health, such as poverty and unemployment (IPCC, 2022[64]).

In addition, it is important to take into account a comprehensive view of households when designing social protection systems. For instance, households with only informal workers face different vulnerabilities or in a different magnitude than mixed households, or those with household members working in the formal economy. These differences present an opportunity to design differentiated public policies that address specific needs to effectively mitigate the vulnerabilities and negative consequences of informality on individuals’ and households’ well being.

Finally, it is essential that social protection systems have funding sources that will ensure their financial sustainability. This can be achieved, in part, by increasing tax revenues through the reduction of generalised subsidies and tax exemptions. For example, energy subsidies have negative externalities (Chapter 4). Among other measures to ensure their financial sustainability are: reducing tax evasion (ECLAC, 2017[65]); creating reserve funds, insurance and catastrophe bonds (Chapter 4); and developing regional risk‑sharing mechanisms. The social protection system becomes more resilient and responsive, contributing to the fight against climate change and supporting a just transition to net zero emissions societies (Stampini et al., 2021[60]). This highlights the importance of comprehensive social protection policies that stimulate return on investment, a lever of structural change. It must be channelled in the right direction through public policy instruments – including taxation, financial policy, technology policy and regulatory policy – to increase relative returns for the benefit of the sectors that drive recovery (ECLAC, 2022[66]). However, a fiscal compact for equality and sustainability first requires a social compact to make this possible. The new social contract needs far‑reaching political agreement and consensus and a different balance among the state, the market, society and the environment (OECD et al., 2021[10]; ECLAC, 2022[67]).

Innovative tax mechanisms could help increase revenues, promote formalisation and reduce inequalities

Innovative income support policies could be worth exploring to increase progressivity and formalisation in tax systems, although further research is needed and so far it has only been used in advanced economies. In addition to promoting further progressivity in personal income taxes, possible useful policies in LAC include negative income tax (NIT), earned income tax credit (EITC) or personalised value‑added tax (P VAT). NIT or EITC programmes generate fewer distortions or disincentives to formalisation of employment than traditional non‑contributory welfare programmes (Pessino et al., 2021[68]). They also avoid generating more fiscal pressure while addressing the equity impact of indirect taxes and reducing poverty, in much the same way as cash transfer programmes. NIT guarantees the revenue of a traditional cash transfer – independent of whether a person is unemployed, employed in informality or employed in the formal sector. As such, when a person secures a formal job, income tax benefits are not eliminated (as in traditional welfare programmes); rather, the worker’s net income increases and, as they earn a higher wage, the refundable tax credit gradually reduces to the point they start paying. That the person continues to receive government aid along with a formal salary ensures that formal job wages are higher, more attractive and more affordable. It should be noted that NIT is targeted to a specific population, not all individuals (Pessino et al., 2021[68]).There is evidence that EITC programmes have many positive effects, including increased labour force participation and poverty reduction, as they reward employment. The difference between EITC and NIT is that, for low‑income wages, transfers increase proportionately to salary; once the salary is high enough, they gradually reduce to zero. Evidence has also shown that EITC helped to reduce informality in the United States, as it can be complemented by other measures, such as refundable tax credits (as long as a person is formally employed) or demand‑side subsidies to firms to incentivise formal employment demand (Pessino et al., 2021[68]). In general, the proposed initiatives have so far been developed and evaluated only in developed countries. Before moving forward with such measures, further research and policies that establish the building blocks are needed, for instance the improvement of the registration/identification of informal workers.

P VAT might be an option to explore to increase fiscal resources while addressing the equity impact of indirect taxes and informality. This strategy consists in applying the VAT to all products and services at a standardised rate and implementing a tax refund based on the incidence of VAT on consumption among the poorest deciles. Using these targeted instruments also addresses the high degree of informality, a feature of most developing countries. As informality makes individuals in the lower deciles invisible, this population rarely benefits from the provision of transfers and public social services. The P VAT is useful in overcoming this situation by including individuals in the informal sector (Barreix et al., 2022[69]).

Higher inflation rates hit low‑income households the hardest

One of the most concerning effects of the Russian invasion of Ukraine on LAC economies is the rise in global commodity prices. Inflation rates are putting pressure on households’ real incomes and savings, and middle‑ and low‑income households are the most vulnerable (Gill and Nagle, 2022[70]). It is estimated that a 1% rise in inflation increases the share of low‑income households by around 7%, while it reduces the share of high‑income households by only 1% (Nuguer and Powell, 2020[71]). Consequently, inflation could also exacerbate inequality, aggravating existing social tensions in one of the most unequal regions in the world (Jaramillo and O’Brien, 2022[72]).

There are three main channels through which inflation affects the poorest particularly hard. The first channel is the unprotected nature of their assets, which undermines their purchasing power during shocks. This results from poor access to financial products and financial assets other than cash, such as interest‑bearing accounts, that could protect their assets against inflation. The second channel is their income composition. In the formal sector, it depends on wages, pensions and social benefits, which are mostly rigid in the short term and respond more slowly to price volatility than the non‑wage income of richer households (Ha, Kose and Ohnsorge, 2019[73]). As 45.3% of the LAC population lives in a household that relies exclusively on informal employment, their incomes are often not indexed and are not protected by social protection systems (Nuguer and Powell, 2020[71]). The third channel is the composition of each household’s consumption basket relative to patterns of price spikes. In emerging economies, 50% of lower‑income people’s spending is on food vs. 20% for the rich (Gill and Nagle, 2022[70]). These channels explain why the most vulnerable are suffering the most from current food prices, which are at historic highs, as is the FAO’s Food Price Index. The situation in the agricultural sector is pushing up prices further, as agricultural production is exposed to rising input costs, particularly from fertilisers and fuels (FAO, 2022[74]).

Recognising the heterogeneity in LAC, it is noteworthy that about one‑fifth of poor households in developing countries are net food producers; thus, this segment might be positively affected by higher food prices (Gill and Nagle, 2022[70]). However, the recent increase in fertiliser prices has been so steep that it has outpaced the gains from higher food prices, even for net food‑producing households (FAO, 2022[75]).

Inflation is affecting the extreme poor on a larger scale than for the national representative household in LAC countries and is pushing millions back into these conditions. There is evidence that the extreme poor face an average price increase 3.55 percentage points higher than the total households in selected LAC countries (Figure 1.11). In Argentina, although year‑on‑year Consumer Price Index (CPI) growth was higher for the general population in the first four months of 2022, in April, year‑on‑year inflation was 1.41 percentage points higher for the extreme poor. Prices are driving more people below the poverty line, pushing millions into food and energy insecurity. It is estimated that in LAC, if prices rise by 2 percentage points above a baseline scenario, extreme poverty would increase by 1.1 percentage points compared to 2021 levels, which translates into 7.8 million people joining the 86.4 million who are food insecure. This adds to the reversed trend of poverty reduction that started in 2020 compared to 2019, with poverty and extreme poverty increasing by 2.5 and 1.7 percentage points, respectively (ECLAC, 2022[1]).

General inflation

Inflation for th e extreme poor

Notes: Year‑to‑date average of year‑over‑year growth of national CPIs vs. growth of extreme poverty lines 2022. Extreme poverty lines are based on the cost of a basic food basket that covers basic food needs and provides the minimum caloric requirement of the members of a reference household. The Chilean extreme poverty line also includes a share of non‑food basic goods and services. For Colombia and Peru, the food and non‑alcoholic beverages division of their CPI was used. For Panama, the data covers the districts of Panama and San Miguelito. Argentina is plotted on the right hand side (RHS) axis. Source: Local sources, OECD construction based on data from national statistic offices on CPIs and poverty lines. 12 https://stat.link/ywso1e

Policy action is needed to reduce the negative effects of inflation rates on the most vulnerable. In the short run, non contributory social protection policies, such as cash transfers, school feeding programmes, and food and in‑kind transfers, could mitigate negative impacts on poor households, as they did for millions of Latin Americans during the pandemic (Jaramillo and O’Brien, 2022[72]). In the long term, governments should put in place reforms to tackle the structural channels through which poor households’ assets are more vulnerable to inflation. Promoting access to financial products and increasing labour formalisation would protect the value of poor households’ assets and shield them through social protection systems (Ha, Kose and Ohnsorge, 2019[73]). In addition, a more granular measurement of the asymmetric impacts of inflation on various income groups would better guide the design of social protection policies (Gill and Nagle, 2022[70]).

Food, energy and fertiliser security must be addressed. In the short term, governments should keep markets open, avoid trade restrictions and use instruments such reducing value‑added taxes on basic consumption baskets. In the long term, greater regional trade integration could generate positive effects on food security, and regional co‑ordination in fertiliser production could help achieve a long‑term goal of reducing dependence on fossil or mineral fertilisers (ECLAC, 2022[1]). Renewable energy mandates have already generated long‑term benefits and have the potential to mitigate the regressive effects of fossil energy price peaks (World Bank Group, 2022[76]). Building a favourable regional ecosystem for green transformation could enable countries to develop more inclusive green energy matrices (ECLAC, 2022[1]).

Key policy messages

Overall, the LAC region is expected to undergo a strong economic slowdown in 2022 due to remaining structural challenges, such as low potential growth and a complicated international context. At the international level, Russia’s war against Ukraine and China’s economic slowdown are making the already challenging scenario of low potential growth and high social vulnerabilities in the LAC region even more challenging. In particular, main indirect channels of Russia’s war against Ukraine relate to lower global GDP growth, disruptions in trade, and higher volatility in both commodity prices and capital markets.

The spike in commodity prices affects the region’s economies in different ways, with net exporters in South America benefiting while Central American and Caribbean countries experience the opposite.

Volatility in capital markets and the normalisation of monetary policies in advanced economies could affect LAC. So far, since March 2022, risk premia increased but remain below the levels seen during the COVID 19 pandemic, and currencies have depreciated in the majority of LAC economies, due to domestic and external factors.

Countries in the region face the challenge of achieving sustainable growth, and a green and just transition, while protecting the most vulnerable. However, this is increasingly difficult, as policy space – both monetary and fiscal – is becoming smaller. Growing inflationary pressures have pushed monetary authorities to control inflation rates and to anchor inflation expectations to promote macroeconomic stability and prevent the negative social effects. Regarding fiscal policy, greater spending requirements to support economic recovery face smaller fiscal capacity as a result of higher debt burdens after the COVID‑19 pandemic and higher debt service costs. Going forward, climate change and the green transition can weigh heavily on fiscal accounts. Therefore, the region will need to mobilise resources to compensate shortfalls and invest more, better and greener to reduce the adverse effects of climate change and finance the green transition.

Although overall poverty levels declined in 2021 compared to 2020, the economic slowdown of 2022 and rising inflation have erased the gains. As inflation most affects the vulnerable, and there is a declining trend in the number and coverage of social protection programmes implemented to address the COVID‑19 crises, it is critical that countries strengthen universal, comprehensive, sustainable and resilient social protection systems.

Box 1.2. Key policy messages

There is an intensification of inflationary pressures that does not appear to be temporary. Central banks across LAC have been increasing policy rates to anchor expectations. In some LAC countries, further increases in interest rates will be necessary to promote macroeconomic stability and limit the negative impact of price increases on the most vulnerable populations.

Unchecked inflation generates poverty traps and takes a particular toll on the most vulnerable, who see their purchasing power quickly erode. With macroeconomic policy space being reduced, most LAC countries will face the multi dimensional challenge of balancing recovery stimulus, financing the green transition, and protecting the most vulnerable, particularly from the impact of inflationary pressures. The composition of the fiscal consolidation that some economies will undertake plays a key role in the strength and inclusiveness of the recovery.

Box 1.2. Key policy messages (cont.)

Fiscal policy will continue to be at the core of the recovery. To be effective, it must take into account the current complex context through well‑defined sequencing of actions and be backed by a broad consensus built through national dialogue and clear communication.

A set of tax policy options are available in LAC that could help increase revenues without compromising the recovery. These include measures to reduce tax evasion and avoidance, increase the progressivity of personal income taxes and policies to improve tax compliance, strengthen tax administration and eliminate inefficient tax expenditures.

A green and just transition will require mobilising further revenues to increase investment that aims to reduce climate related risks (physical and transition risks), and helps to advance a more sustainable and inclusive model of production and consumption that creates new quality green jobs.

Social challenges from the COVID‑19 pandemic remain. Households living in poverty and extreme poverty, but also non‑poor, low‑income and lower‑middle‑income households, face persisting high inequality and high levels of vulnerability. Inflation exacerbates this, as increases in food, energy and fertiliser prices affect the most vulnerable through various structural channels, such as the nature of their assets and the composition of their income and consumption basket.

To counteract the regressive effects of inflation in LAC, governments should complement monetary measures with fiscal policies, such as social protection policies. These could protect poor households, as they did for millions of Latin Americans during COVID‑19. Longer‑term policies to protect the value of poor households’ assets include promoting access to financial products and increasing labour formalisation, which would shield them through social protection systems.

Strengthening universal, comprehensive, resilient and sustainable social protection systems will be a key determinant in containing the social crisis.

In response to the episode of rising inflation and to ensure food and energy security, the region has the opportunity to strengthen domestic trade and to foster an integrated regional ecosystem to boost fertiliser security and inclusive energy matrices.

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OECD/ILO (2019), Tackling Vulnerability in the Informal Economy, Development Centre Studies, OECD Publishing, Paris, https://doi.org/10.1787/939b7bcd en [49]

OECD/The World Bank (2020), Health at a Glance: Latin America and the Caribbean 2020, OECD Publishing, Paris, https://doi.org/10.1787/6089164f en [52]

OECD/The World Bank (2019), Fiscal Resilience to Natural Disasters: Lessons from Country Experiences, OECD Publishing, Paris, https://doi.org/10.1787/27a4198a en. [28]

Parra, F. (2021), The complex energy transition of Chile’s “sacrifice zones”, China Dialogue, London, https:// dialogochino.net/en/climate energy/42193 the complex energy transition of chiles sacrifice zones/. [37]

Pessino, C. et al. (2021), Now it is the time to foster labor formalization in Latin America and the Caribbean, Inter‑American Development Bank, Washington, DC, https://blogs.iadb.org/gestion fiscal/en/ now it is the time to foster labor formalization in latin america and the caribbean/ [68]

Porras, I. and N. Asquith (2018), Ecosystems, poverty alleviation and conditional transfers, International Institute for Environment and Development, London, https://pubs.iied.org/sites/default/files/ pdfs/migrate/16639IIED.pdf [57]

Ruhl, C. and T. Erker (2021), Oil intensity: The curiously steady decline of oil in GDP, School of International and Public Affairs, Columbia University, New York, http://www.energypolicy.columbia.edu/sites/ default/files/file uploads/LongTermOilIntensity_CGEP_Report_083121.pdf [6]

Solano‑Rodríguez, B. et al. (2019), Implications of climate targets on oil production and fiscal revenues in Latin America and the Caribbean , Inter‑American Development Bank, Washington, DC, https://doi.org/10.18235/0001802 [30]

Stampini, M. et al. (2021), Adaptive, but not by design: cash transfers in Latin America and the Caribbean before, during and after the COVID‑19 Pandemic, Inter‑American Development Bank, Washington, DC, https://doi.org/10.18235/0003795 [60]

Titelman, D. (2022), Política fiscal para el desarrollo sostenible: cierre de brechas estructurales y adaptación al cambio climático. [43]

Titelman, D. et al. (2022), Fiscal Impact Estimates of a Net‑Zero Emissions Transit for Major Hydrocarbon Producers in Latin America and the Caribbean, Task Force on Climate, Development and the International Monetary Fund, http://www.bu.edu/gdp/files/2022/04/TF WP 004 FIN.pdf. [33]

UNCTAD (2022), World Investment Report 2022, United Nations, New York, https://unctad.org/ webflyer/world investment report 2022 [7]

Vogt‑Schilb, A., G. Reyes‑Tagle and G. Edwards (2021), Are Latin America’s fossil fuels at risk of becoming stranded assets this decade?, https://blogs.iadb.org/sostenibilidad/en/are latin americas fossil fuels at risk of becoming stranded assets this decade/ [31]

Watson, C. (2016), Shock‑Responsive Social Protection Systems Research ‑ Working Paper 3: Shock‑Responsive Social Protection in the Sahel: Community Perspectives, Oxford Policy Management, Oxford, https://www.opml.co.uk/files/Publications/a0408 shock responsive social protection systems/ wp3 community perspectives sahel en.pdf?noredirect=1 [51]

Welsby, D. et al. (2021), High and Dry: Stranded Natural Gas Reserves and Fiscal Revenues in Latin America and the Caribbean, Inter‑American Development Bank, Washington, DC, https://publications.iadb. org/en/high and dry stranded natural gas reserves and fiscal revenues latin america and caribbean [32]

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Chapter 2

Harnessing the potential of the green transition to build a more inclusive development model

A green transition that places citizens’ well‑being at its centre could help Latin America and the Caribbean (LAC) move towards a more inclusive and sustainable development model. First, this chapter maps out where the region stands regarding environmental indicators. Second, it argues why the green transition is an opportunity for the post‑COVID‑19 recovery in the region. Third, it puts forward a multi‑dimensional, systemic approach to advancing a green and just transition and focuses, in particular, on a territorial sustainable development model and policies needed to accelerate the transition towards sustainable transport and urban systems. Last, the chapter highlights main policy messages.

Harnessing tHe potential of tHe green transition to build a more inclusive development model

LAC needs to advance the green transition while fostering sustainable and inclusive development

LAC is one of the most vulnerable regions to the consequences of climate change

The average number of extreme climate-related weather events in LAC increased by60.2% between 2001 and 2022 compared to the previous two decades

In the Caribbean, the annual cost of not dealing with the effects of sea level rise is estimated to reach

USD 22 billion per year by 2050 (10% of GDP) and USD 46 billion per year by 2100 (22% of GDP)

LAC’s total greenhouse gas emissions (GHG) have been steadily rising since 1990, re ecting an unsustainable development model in the region

Climate change is projected to push 5 million more people into poverty by 2030 in LAC Regional

GHG emissions, 2019

A systemic approach to the green transition can help implement public policies centred on citizens’ well-being

Instead of focusing on specific problems, a systemic approach designs systems that produce better social, economic and enviromental results

Systemic transport policies can:

Reduce energy consumption

Lower emissions

Yield lower mobility and high accessibility

Offer equitable opportunities

Promote healthier lifestyles

Introduction

Climate change is an urgent concern that demands local and regional actions that support globally agreed targets. At the current rate of global greenhouse gases (GHG) emissions, the Paris Agreement goal of limiting – by 2030 – global warming to a maximum between 1.5°C and 2°C will be difficult to achieve (IPCC, 2018[1]). Despite the LAC region’s contribution to global emissions being around 8.1%, the region has proved to be particularly vulnerable to the effects of climate change. The unequal consequences of climate change are being felt at the environmental, economic and social context. Without immediate implementation of polices for mitigation and adaptation,1 the effects of global warming are expected to intensify in the coming years and to continue affecting disproportionately the most vulnerable countries and their most exposed socio‑economic groups.

The recent crisis generated by the coronavirus (COVID‑19) pandemic has led to a significant development setback in LAC. Recovery strategies require rethinking health, social and economic strategies and are also an opportunity to address the environmental and climate emergency (OECD et al., 2021[2]). The region is particularly vulnerable to the consequences of climate change and the cost of inaction is high. Hence, it is imperative to minimise risks by increasing resilience, which requires a better understanding of how the region contributes to and is affected by climate change.

LAC is at a critical juncture that poses an opportunity for action. The post‑COVID‑19 recovery, a complex global scenario and the pre‑existing development traps in the region must be seen as a strategic context to make structural changes that help the region move towards a more sustainable, resilient and inclusive development model. A green and just transition represents a unique opportunity to take this leap forward, by focusing on effectively transforming and decarbonising the systems that underpin the economy and society to improve almost every aspect of the lives of Latin American citizens.

We conceive the green transition as a means to foster a more sustainable and just development model in LAC. This model should help close the existing social, economic, institutional and environmental development gaps and avoid generating new ones (OECD et al., 2019[3]). A green transition is not only about fighting climate change. A green and just transition aims to advance a greener and more just model of production and consumption that creates new quality green jobs, generates the conditions for workers to acquire new green and digital skills, and supports firms to adopt more sustainable production schemes, including those in brown sectors, which will be more affected throughout the transition and with a special focus on SMEs. Moreover, a green and just transition should contribute to the eradication of poverty and strengthen social inclusion mechanisms, without concentrating only on compensation schemes.

A green and just transition should adopt a systemic approach that produces better socio‑economic and sustainable results and should be co‑designed by governments and all members of society, across socio‑economic groups, territories, generations and genders. Only a strong consensus on what, why and how the green transition is articulated will allow its proper fulfilment. Given the potentially transformational effect of the green transition, mainstreaming climate mitigation and adaptation policies as cross‑cutting issues across levels and agencies of government is key. Failure to integrate the social dimension horizontally and vertically, runs the risk of undermining societal acceptance of environmental policy reforms embedded in the green transition. Integrated approaches would allow social development priorities to be taken fully into account in the transition, helping drastically reduce multi‑dimensional inequalities (AFD, 2020[4]).

First, this chapter maps out where the region is standing regarding climate change and environmental degradation. Second, it argues that the green transition should be a

Harnessing tHe potential of tHe green transition to build a more inclusive development model priority for LAC and explains how it can respond to structural development challenges. Third, it proposes a systemic approach to guide the policies needed for a green and just transition, giving special relevance to the role of subnational governments. Finally, the chapter provides key policy messages.

A green transition demands a co‑ordinated and systemic response to address climate change effects

At current rates, global warming will reach the 1.5°C threshold between 2030 and 2052 (IPCC, 2022[5]). This is a short horizon, particularly for green policies. Even the commitments for the 2°C scenario already require revisions due to the levels of GHG emissions of the four major emitters (the People’s Republic of China [hereafter, “China”], India, the United States and the European Union). At major emitters’ current rates, the rest of the world will lose its margin of emissions reduction to comply with the global carbon budget of the 2°C threshold (Bárcena et al., 2020[6]). The actions needed to address climate change are challenging from a global perspective. The time frames of mitigation and adaptation policies are longer, given their complexity and transformational effect, and therefore need to be addressed urgently. In this way, international partnerships are crucial to co‑ordinate worldwide efforts to achieve a just distribution of emissions reduction (Chapter 6).

Burning of fossil fuels and deforestation are the main causes of climate change. Human activity and its emissions are increasingly causing changes in atmospheric and ocean temperature, precipitation, and wind patterns which have direct consequences for the planet (IPCC, 2021[7]), and for social well‑being. The observed negative impacts over the environment make the current development model based on extractive and natural resource‑dependent economies unsustainable and calls for a co‑ordinated response.

A whole‑of‑government approach that places environmental issues as a transversal axis of public policy is necessary to mitigate the effects of climate change and develop a more sustainable and inclusive economic model. The post‑COVID‑19 recovery illustrates the need for such a response. Global carbon dioxide (CO 2) emissions rebounded to their highest level in history in 2021, reaching 36.3 Gt. The increase in global CO 2 emissions of over 2 Gt was the largest in history in absolute terms, more than offsetting the previous year’s pandemic‑induced decline. Due to the contraction caused by the pandemic, most of the world’s economies recorded a reduction in CO 2 emissions of between 5% and 10% in 2020 compared to 2019 (IEA, 2021[8]). The evolution of CO 2 emissions from energy combustion and industrial processes reflects the consequences of promoting a recovery concentrated in setting economies “back on track”. The progress gained on GHG emissions trends or clean air during previous years was quickly reversed in 2021 due to a recovery defined by a pre‑pandemic economic approach. While productivity indicators might have recovered, it is important to align broader policy efforts towards a sustained transition of emissions reduction. Otherwise, the tendency will continue to be the former carbon‑intensive growth path.

Climate change is a global but heterogeneous and asymmetric phenomenon that entails inequalities (Bárcena et al., 2020[6]). It disproportionately affects the most vulnerable, threatening poverty reduction. It is estimated that globally, by 2030, 68 to 135 million people could be pushed into poverty because of climate change (World Bank, 2020[9]).

2. Harnessing tHe potential of tHe green transition to build a more inclusive development model

LAC needs to be part of the global fight against climate change

Given its share in total global GHG emissions compared to countries with similar or higher development levels, LAC is usually associated with better environmental performance. The regional shares of total world GHG emissions are disproportionately distributed, as East Asia and the Pacific had the highest emissions in 2019, contributing 37.5%, while Europe and Central Asia represented 14.4%, North America 13.2%, South Asia 8.4% and the LAC region 8.1%, more than the Middle East and North Africa (MENA) (7.5%) and sub‑Saharan Africa (7.3%) (Figure 2.1). LAC’s share in total GHG emissions is proportional to its share in total world population (8.4%) and slightly higher than its share in total GDP (6.4%) (Ined, 2022[10]; World Bank, 2022[11]), showing that the region sustains the same carbon‑intensive development model as the high emitters. In terms of subregions, the Caribbean contributed 0.4% to total global emissions in 2019, Central America 1.7%, and South America had the biggest share with 6.1%.

Notes: Emissions including LUCF reported in Gt of CO 2e. Total emissions do not include bunker fuels. The Climate Analysis Indicators Tool (CAIT) was used as the data source. The CAIT dataset is the most comprehensive on Climate Watch and includes all sectors and gases. Climate Watch Historical GHG Emissions data (previously published through CAIT Climate Data Explorer) are derived from several sources. The use of the land use change and forestry (LUCF) or agriculture data is cited as (FAO, 2022[12]). For fuel combustion data, it is cited as (OECD/IEA, 2021[13]).

Sources: (Climate Watch, 2022[14]); (FAO, 2022[12]); (OECD/IEA, 2021[13]).

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LAC data show a steady increase of total GHG emissions since 1990, reflecting its development model. Between 1990 and 2019, Brazil, Mexico, Argentina, Venezuela and Colombia consistently had higher levels of emissions than other LAC countries (Figure 2.2).2 This explains the steady increase in South America’s emissions, further than the Caribbean and Central America3 and even OECD countries, which in turn have managed to decrease average total emissions since 2005 (Figure 2.3).4

Harnessing tHe potential of tHe green transition to build a more inclusive development model

Figure 2.2. Top 10 countries of total GHG emissions, 1990-2019

Note: Total GHG emissions excluding LUCF. Top 10 countries are the 10 countries that emit the most in the LAC region when analysing total GHG emissions in 2019.

Sources: (Climate Watch, 2022[14]); (OECD/IEA, 2021[13]); (FAO, 2022[12]).

12 https://stat.link/ty5o2i

The level of total GHG emissions in LAC has increased by 1 223 Mt CO 2e from 1990 to 2019, representing a 61% increase. On average, emissions in the three subregions have been increasing with a peak in 2015 and a slight decrease in 2019. Total emissions in the Caribbean subregion increased from 125.8 Mt Co 2e in 1990 to 155.4 in 2019. Although this is a small share of total LAC emissions (5%), it represents a 23.5% increase rate for a small region. If LUCF is considered, the amount rises from 125.1 Mt Co2e in 1990 to 180.4 in 2019, representing an increase rate of 44.2%. Total emissions in Central America increased by 70.5% over the same time period (Figure 2.3). If LUCF is considered, the increase rate rises to 54.4%. Indeed, the pattern of increasing total GHG emissions in LAC shows that the region is no exception and that reversing the trend will require ambitious mitigation and adaptation policies.

Note: Total GHG emissions excluding LUCF. OECD average is a simple average of the largest set of all OECD member countries, as of May 2022, for which data are available.

Sources: (Climate Watch, 2022[14]); (OECD/IEA, 2021[13]); (FAO, 2022[12]).

In 2019, LAC’s average per capita GHG emissions level equalled the global average (6.3 t CO2e) and was lower than the OECD average (9.1 t CO 2e). When comparing emissions per capita, the Caribbean countries show the highest levels due to a non proportional relationship between the size of their population and their high levels of emissions (Figure 2.5).

2. Harnessing tHe potential of tHe green transition to build a more inclusive development model

Grenada, Trinidad and Tobago, and Barbados emitted around 20, 21 and 13 t CO 2e in 2019, respectively. When analysing the top 10 countries with highest total emissions, Venezuela, Argentina and Paraguay show levels of per capita emissions of 9, 8 and 7 t CO 2e, respectively (Figure 2.4). Identifying the origins of these emissions in each country is paramount to help raise awareness of the urgent need to take action in the highest emitting sectors.

Top 10 countries of total emissions, 1990 2019

Note: GHG emissions excluding LUCF. Selected LAC countries are the 10 countries that emit the most in the LAC region when analysing total GHG emissions in 2019.

Sources: (Climate Watch, 2022[14]); (OECD/IEA, 2021[13]); (FAO, 2022[12]).

12 https://stat.link/qi39sm

Since 1990, GHG emissions per capita in LAC have remained largely constant (between 5.5 and 6.4 t CO2e without LUCF and between 8.1 and 8.4 including LUCF) while OECD countries have made significant progress in lowering their averages; as such, the gap between the two regions has been closing. The Caribbean subregion has the highest emissions per capita within LAC, and it has managed to slightly decrease them from 8.4 t CO 2e in 1990 to 7.7 t CO 2e in 2019 without LUCF (Figure 2.5)7 and from 11.5 to 10.7 including LUCF.

Note: GHG emissions excluding LUCF. OECD average is a simple average of the largest set of all OECD member countries, as of May 2022, for which data are available.

Sources: (Climate Watch, 2022[14]); (OECD/IEA, 2021[13]); (FAO, 2022[12]).

12 https://stat.link/df8qaw

Harnessing tHe potential of tHe green transition to build a more inclusive development model

Emission levels also evidence a historic, unjust and disproportionate share of responsibility between rich and poor countries and across their various socio‑economic groups (Guivarch, Taconet and Méjean, 2021[15]). The double asymmetry explained earlier is illustrated in Figure 2.6. Regionally, North America stands out, with the top 10% of citizens by income emitting 73 t CO 2e per capita. The same quintile shows similar patterns in East Asia and Europe, emitting 30‑40 t CO 2e per capita. Even in less‑developed regions with lower total emissions, such as Latin America or sub‑Saharan Africa, this pattern persists but on a lower scale (Figure 2.6) (Guivarch, Taconet and Méjean, 2021[15]).

Note: Latin America refers to Argentina, Brazil, Chile, Colombia and Mexico, due to data availability.

Source: (WIR, 2022[16]).

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Since 1990, emissions from almost all sectors have grown continuously in LAC, with the greatest increase in the energy sector; 738 Mt CO 2e from 1990 to 2019 (Figure 2.7).8 In the agricultural sector, GHG emissions increased 100% between 1961 and 2010 (Tubiello et al., 2014[17]), primarily due to the rise in extensive grazing systems in South and Central America. In a smaller, more recent time frame (1990 to 2019) emissions from agriculture increased around 32%. Direct GHG emissions from agriculture are expected to continue rising by 1.1% annually between 2022 and 2031, but the rate of output growth is only around 0.01%, suggesting a persistent carbon intense production (OECD/FAO, 2022[18]). While the industrial and waste sectors produce emissions at a lower scale, their growth rates have been significant (193% and 108%, respectively). To address this constant growth in emissions from almost all sectors, targeted responses are needed in LAC. Programmes and policies should include digitalised and tailored solutions for each sector, from subsistence agriculture to renewable energy and technological intensification for competitiveness and further global integration.

Notes: LAC includes 33 countries with available data. The energy sector includes building, electricity and heat, fugitive emissions, manufacturing and construction, other fuel combustion and transport.

Sources: (Climate Watch, 2022[14]); (FAO, 2022[12]); (OECD/IEA, 2021[13]).

12 https://stat.link/h12wto

The structure of emissions in LAC differs from that of the EU and OECD countries. Whereas the energy sector (which includes building, electricity and heat, transport, fugitive emissions, manufacturing and construction, and other fuel combustion) accounts for 83.5% of OECD countries’ total emissions and 80% for EU, three sectors represent 88.3% of total emissions in LAC, comprising energy (43.5%), agriculture (25.3%, more than double the OECD) and LUCF (19.5%) (Figure 2.8).9 Although the energy sector remains the most emission‑intensive for all three subregions, each one has its particularities. South America’s high emitting sectors are agriculture (28.5%), LUCF (23.8%), and transport (13.4%). The Caribbean differs slightly, with electricity and heat (24.8%) followed by agriculture (15.6%) and LUCF (13.4%, very similar to transport at 11.1%). In Central America, electricity and heat accounts for 23.8% of emissions, while transport accounts for 21.4%, followed by agriculture with 16%. A deeper understanding of the structure of emissions would contribute to a cleaner productive strategy that protects the land and avoids long‑term consequences in terms of food security and vulnerability to external shocks (Chapter 3).

Sources: (Climate Watch, 2022[14]); (FAO, 2022[12]); (OECD/IEA, 2021[13]).

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Harnessing tHe potential of tHe green transition to build a more inclusive development model

The growth of transport sector emissions contributes the most to the increase of energy‑related GHG emissions in LAC (Bárcena et al., 2020[6]), followed by electricity and heat production (where oil is the main source of emissions, followed by natural gas and coal). While figures for all three generators rose between 1990 and 2014, there has since been some progress: GHG emissions from oil, natural gas and coal have either decreased or remained constant, showing that the region has potential for a net‑zero transition (IEA, 2021[19]).

Forest loss is a prevailing trend in the region (Figure 2.9), explained by new uses of land for agriculture, forestry, and stockbreeding, and to a lesser extent by the expansion of cities and highway building (ECLAC, 2021[20]). In the last 20 years, Brazil shows the highest total forest area lost (544 690 km2), at a loss rate of around 10%. Deforestation by logging in Brazil has accelerated since 2012, and particularly in recent years with 11 088 km2 deforested in 2020. Although the forest areas involved are smaller, Nicaragua and Paraguay also stand out with the highest loss rates in the last 20 years. Costa Rica and Chile stand out as they managed to increase forest cover. Strong government capacity to enforce law in general, and land tenure in particular, can secure property rights and help fight illegal deforestation and unsustainable agricultural and livestock practices.

Notes: Forest area is land under natural or planted stands of trees of at least five meters in situ, whether productive or not, and excludes tree stands in agricultural production systems (for example, in fruit plantations and agroforestry systems) and trees in urban parks and gardens (World Bank, 2021[21]). The primary axis shows the percentage change of forest land regarding the year 2000; the secondary axis shows the total change of forest in km² between 2000 and 2020.

Source: Authors’ elaboration based on (World Bank, 2021[21]).

Fossil fuels still dominate energy supply in LAC

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The region’s primary energy supply remains predominantly fossil‑based at 66% by 2020, making the region vulnerable to global fuel shocks. Nevertheless, the total energy supply in the region is much cleaner than that of the world, where 33% is renewable compared with 13% at the global level (Figure 2.10). The primary supply of renewables in LAC includes hydroelectric power (9%), biofuels such as firewood and bagasse (18.8%), solar and wind (5.1%) and geothermal (0.9%). The second greatest supply of energy is natural gas (31%), which slightly surpassed the oil share (30%), possibly because of the effects of COVID‑19 pandemic, followed by coal (5%), and nuclear energy (1%) (Figure 2.10). The trend in the region is one of absolute and proportional growth of renewable energy sources, mainly hydropower and increasingly solar and wind, followed by biofuels. Between 1970 and 2020, the primary energy supply grew 2.44 times, while the renewable portion grew faster, from 25% in 1971 to 33.6% in 2020, although the decrease in economic activity (‑6.8% GDP in 2020) and in the regional energy supply due to the pandemic must be taken into account (Chapter 3).

2.10. World and Latin America and the Caribbean total energy supply matrix, 2020

Notes: Total energy supply consists of production + imports – exports – international marine bunkers – international aviation bunkers +/‑ stock changes. Renewable energy – other includes biofuels, solar, wind, and geothermal energy.

Source: Authors’ elaboration based on (Sistema de Informacion energetica de Latinoamerica y el Caribe (SieLAC), 2020[22]).

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LAC countries have been implementing policies designed to reduce their dependence on fossil fuels. However, emissions generated by oil and gas represent the primary source of pollution across the region, reaching 90% or above of CO 2e in countries such as Costa Rica, El Salvador, Paraguay and Uruguay. Although energy produced by coal has been decreasing across the region, some LAC countries remain highly dependent (e.g. Chile, Colombia, the Dominican Republic and Guatemala) with associated consequences in pollution levels (Tambutti and Gómez, 2020[23]). Nonetheless, in 2019, Chile approved a Coal Phase‑Out Plan, aiming to close all coal‑fired power plants by 2040 and already 5 of 28 existing plants have been closed (Gobierno de Chile, 2021[24]). The Caribbean is highly dependent on imported fossil energy. Only Trinidad and Tobago, Suriname and recently Guyana have significant domestic energy resources (ECLAC, 2021[25]).

The region has slightly decreased its energy intensity in the last three decades, but mainly because of limited industrial development, the impacts generated by COVID‑19 and Russia’s invasion of Ukraine. In final energy consumption across the region, the main economic activities are transport (36%), industry (30%) and the residential sector (17%), agriculture, fisheries and mining (6%), and trade and services (5%) (Sistema de Informacion energetica de Latinoamerica y el Caribe (SieLAC), 2020[22]). Governments should progress

Harnessing tHe potential of tHe green transition to build a more inclusive development model faster to improve energy intensity in all uses and sectors. The electrification of transport and industry through renewables can offer an alternative to significantly reduce fossil fuel dependency, improve energy security, and greatly increase energy efficiency (e.g. an electric vehicle is 3 to 4 times more efficient than a combustion vehicle, however the electricity must come from renewable sources) (Chapter 3). This should be complemented with the promotion of more efficient public transport systems to ensure a well being centred approach. Nuclear energy could also be considered, as it does not produce GHG emissions. Nevertheless, given the radioactive waste management challenges, the potential risk of accidents and the security issues it implies, governments should closely follow the developments of promising innovations such as nuclear fusion in the medium term.

The effects of climate change are severely felt in LAC

LAC is one of the world’s most vulnerable regions to the consequences of climate change. Among the 50 countries most affected by climate emergency, 13 are in LAC,10 based on 2000‑2019 data (Germanwatch, 2021[26]). Considering geophysical and climate‑related disasters together, the region is the second‑most disaster prone in the world (OCHA, 2020[27]). Nearly half the population is assumed to be highly or extremely vulnerable to risks of climate‑related impacts (CAF, 2014[28]). The average number of extreme climate‑related weather events in LAC increased in most countries between 2001 and 2022 compared to the previous two decades. (Figure 2.11). In total, of the 11 933 climate‑related extreme weather events registered worldwide between 1970 and 2022, 17.1% occurred in LAC. Warming temperatures, extreme precipitation events that result in floods, landslides and droughts, sea level rise, coastal erosion, ocean and lake acidification resulting in coral bleaching, and storm surges are expected to increase in frequency and severity, with adverse socio‑economic consequences on populations (IPCC, 2022[29]). The region’s vulnerability highlights the real and urgent need to address climate change.

Figure 2.11. Frequency of climate-related extreme weather events in LAC, 1980-2022

Notes: Based on (Alejos, 2018[30]), extreme weather events were defined as a natural disaster resulting in 100 000 or more people affected, or 1 000 or more deaths, or at least 2% of GDP in estimated economic damages. The following natural disasters were considered: landslides, storms, droughts and floods. The secondary axis refers to the countries’ surface area.

Sources: Authors’ elaboration based on data from (EM‑DAT, 2022[31]); (IDB, 2021[32]); (Alejos, 2021[33]); (FAO, 2018[34]). 12 https://stat.link/cfx6s5

The impacts of climate change vary due to differing geographies, capacities to adapt and differing levels of socio‑economic vulnerability (IPCC, 2022[29]). Central America and the Caribbean are two of the most vulnerable regions in the world,11 mainly due to their geographical location and large coastal extensions with high population concentration. Adaptation is therefore among their top development priorities (Bárcena et al., 2020[6]; Germanwatch, 2020[35]; Bleeker et al., 2021[36]). More than half of Caribbean countries are extremely exposed to risks (CAF, 2014[28]) generated by extreme weather events, such as hurricanes and severe storms, increased intensity and frequency of droughts, sea level rise and ocean acidification. In Central America, extreme weather events have increased, on average, by 3% per year over the past 30 years (IPCC, 2022[29]). Vulnerable groups in both regions are the least prepared and the most affected by these events. Lower income households in the Caribbean have a greater chance of suffering longer periods of displacement after a natural disaster, as they might not receive enough financial help to rebuild their houses (Bleeker et al., 2021[36]). In Puerto Rico, after Hurricane Maria (2017), families from upper quintiles were able to rebuild their houses quickly or even leave the island, while poorer families waited months or even years for underfunded relief efforts to help them (McCarthy, 2020[37]). The severe impacts of climate change illustrate the need to continue building resilience and adapt to the current and future effects of climate change.

Climate change is having a direct impact on LAC’s biodiversity, declining at twice the rate seen in OECD countries. Chile, Ecuador and Mexico account for the largest falls, but every country in the region is considered to have “high‑risk” rates (OECD, 2021[38]). The entire LAC region is home to major ecosystems that are directly under pressure because of climate change and unsustainable development strategies. Retreating glaciers, bleaching coral reefs or loss of ecosystem services undermines the ability of ecosystems to provide a shield against growing climate‑related risks and creates additional vulnerabilities (IPCC, 2022[29]). The Amazon rainforest in particular is projected to continue being increasingly threatened by fires and forest degradation.

Average temperatures will continue to rise throughout LAC. The average temperature recorded for the period 1991‑2020 is more than 1°C higher than the average for 1901‑30 (Figure 2.12). The last 30 years have been the warmest on record, with the sharpest increases in countries located at the region’s most northern and southern latitudes. Some locations in Brazil and Paraguay, such as Asuncion, Belo Horizonte, Cuiaba and Curitiba, recorded their highest temperatures ever, and the Caribbean, Central America and Mexico were affected by heatwaves and extreme temperatures. The year 2020 was one of the warmest in the region’s history, one of the three warmest in Central America and the Caribbean, and the second‑warmest in South America. The largest temperature increases were recorded in the Caribbean, confirming its greater vulnerability to climate change (WMO, 2021[39]).

Note: Temperature reported in °C.

Source: Economic Commission for Latin America and the Caribbean (ECLAC) on the basis of (World Bank, 2021[40]).

Global warming has direct impacts on ocean and coastal ecosystems. Global warming is one of the main causes of sea level rise and will increase the intensity and timing of extreme weather events in the Caribbean. More than 50% of Caribbeans live within 1.5 km of the coastline and one‑third live in low‑elevation zones. Given the region’s proximity to the equator, sea level rise generated by higher temperatures will continue to erode coasts, damage ecosystems and lead to land loss, household damage, relocations and business closures (Bleeker et al., 2021[36]).

Temperature rise also directly affects other water sources. Decreasing water availability is another impact of climate change that can particularly affect Central America. By 2100, per‑capita water availability in Central America is projected to decrease by 82% and 90%, on average, under low‑ and a high‑emissions scenarios, respectively (ECLAC/DFID, 2010[41]). Water stress in LAC (below 15%) is lower than the OECD (20%) average; however, there is a lot of heterogeneity in the region. In countries including Brazil, Colombia and Peru, the share of withdrawal from freshwater sources is well below 5%, whereas in the Dominican Republic and Mexico, figures are above 25% (OECD, 2021[38]). Even if some of the long‑term changes, such as sea level rise, ocean acidification or melting of Arctic ice, will be irreversible, there is still a window of opportunity to avoid the worst consequences, if the right policies are adopted (Chapter 3) (Hickey and Wellenstein, 2021[42]).

The promotion of mitigation and adaptation policies in LAC will require a deeper understanding of its complexities, further funding and a strengthening of their policy coherence. The lack of trustworthy information is a main barrier to better mitigate and adapt to the effects of climate change in LAC is. The governments of the region need to invest in data creation and analysis; raising awareness; financial and technical capacity; co‑ordination among relevant policy makers with potentially diverging objectives; and integration of Indigenous and local knowledge systems. Effective climate mitigation and adaptation should include as much detailed information as possible to identify the most exposed areas and their vulnerable groups. Reliable and specified data are also crucial to develop more and better digital risk mitigation tools (CAF, 2014[28]). The transparent design of public policies, as well as the research and development of innovative responses to climate change, depend directly on the availability of this kind of data. LAC countries should continue strengthening the statistical infrastructure and advancing in the construction of digitalised databases, the integration of tools to measure risks, and the design of policies based on solid evidence. These efforts need to be multiplied and better co‑ordinated, while also including as many stakeholders as possible (Chapter 5).

Further funding is needed for the implementation of more and better adaptation policies. During 2019 and 2020, funding for mitigation policies in LAC averaged USD 28 billion, while adaptation policies only received USD 4.5 billion (Chapters 4 and 5) (Buchner et al., 2021[43]). While there is marked heterogeneity in the region, overall results are positive and exemplify why the region should deepen its efforts by increasing the funding of adaptation policies. Adaptation policies and strategies designed to address climate risks at the local and national levels can reduce both exposure and vulnerability to climate change impacts. Positive signs of progress show that LAC can implement more and better adaptation policies. Protected areas are the most important policy instrument for biodiversity protection implemented in LAC, namely for ecosystem based adaptation through conservation and restoration (OECD, 2018[44]). The region has the largest extent of biodiversity protection (8.8 million km 2) in the world (RedParques, 2021[45]). In total, 25% of land and 24% of marine areas are protected, both above the OECD average. Terrestrial protection has increased by 9 percentage points since 2000, while protection of marine areas has more than doubled in some LAC countries (Chapter 3) (OECD, 2021[38]).

Policy coherence among short‑, medium‑ and long‑term objectives should also be encouraged, to better preserve the accomplishments and future goals of mitigation and adaptation policies. This can be accomplished by ensuring that short‑term actions are consistent with long‑term goals and by enforcing existing policies. Addressing the transboundary and long‑term effects of policies will help LAC governments to take more informed choices about sustainable development while ensuring the well‑being of future generations. Besides a proper funding and access to updated data, governments can strengthen policy coherence with investment in human resources, development of new skills for local bureaucracies, an inclusive governance and strong systems of monitoring and evaluation (M&E) systems (Chapter 5) (IPCC, 2022[29]).

Why should the green transition be a priority for LAC?

In LAC, government’s efforts to recover from and offset the impacts of the COVID‑19 pandemic have not incorporated the environmental dimension. So far, the opportunity to target recovery spending towards more transformative and green sectors has not been seized. The recovery has prioritised a high demand of non‑renewable resources, which underlines the unsustainable nature of the pre‑pandemic development pattern (ECLAC, 2022[46]).

The green transition is a structural challenge that LAC will have to contend with sooner or later. The estimated cost of inaction highlights the benefits of urgently adopting policies for adaptation and mitigation, while the extreme consequences of climate change are increasingly being experienced in the region. Given the impact the pandemic had on the region, the post‑COVID‑19 context is a timely opportunity to combine recovery measures with green policies, and to advance a just transition that could help achieve higher levels of well‑being. A new sustainable development model in LAC demands a

Harnessing tHe potential of tHe green transition to build a more inclusive development model green transition that is just throughout its process, from its design to its implementation (AFD, 2020[4]). A green transition can also reduce the region’s vulnerability to the effects of climate change while opening new, future oriented market opportunities.

Despite LAC’s relatively lower contribution to total GHG emissions, the region is highly vulnerable to the effects of climate change. The last 30 years have been the warmest on record, with the sharpest increases in the countries located at the region’s northern and southern latitudes. In 2021, the region experienced several extreme weather events, such as low temperatures and snowfall in southern Brazil and droughts and high temperatures in central Chile. In 2020, for the fifth consecutive year, the Atlantic hurricane season was abnormal (IPCC, 2021[7]).

Climate change and environmental degradation are generating a direct social and economic impact. Many countries in LAC are experiencing a fall in agricultural productivity and tourism, as well as climate‑driven migration and high reconstruction costs after natural disasters. In the Dominican Republic, the heavy rains of 2016 generated severe economic losses in crops such as plantain, cassava and sweet potato. During the hurricane season of 2017, an estimated loss of USD 52 million was recorded due to lower touristic activity (OECD/UNCTAD/ECLAC, 2020[48]). Natural disasters create a need to increase expenditure and thus have direct impacts on fiscal deficits and public revenues. On average, a natural disaster results in a reduction of public revenues equivalent to 0.8% and 1.1% of GDP, for lower middle‑income and low‑income countries respectively (Chapter 1) (Alejos, 2021[33]). In the case of the Caribbean, the annual cost of inaction to deal with the effects of sea level rise, is estimated to reach USD 22 billion per year by 2050 (10% of GDP) and USD 46 billion by 2100 (22% of GDP) (AFD, 2022[47]). In the case of Haiti and Puerto Rico, two of the three most affected countries in the world between 1999 and 2018, annual GDP losses reached 2.38% and 3.76%, respectively (Internal Displacement Monitoring Centre, 2022[49]). If environmental degradation is not addressed soon, LAC governments will have to add the costs of climate change to those of social vulnerability. The link between the dependence on biodiversity and financial security has proved to be very close, and the cost of inaction could have unprecedented economic and social consequences (Chapters 1 and 4) (Bárcena et al., 2020[6]).

A recovery strategy aligned with a green transition is an opportunity to overcome the region’s development traps

The crisis generated by COVID‑19 has led to a historic economic downturn in LAC. Almost 25% of the jobs lost in 2020 were not recovered in 2021, deepening the social gap that characterises the region (ECLAC/ILO, 2022[50]). The COVID‑19 recovery can be a strategic moment to align LAC policy objectives with a green and just transition. Productivity, social vulnerability, institutional and environmental traps – which are closely interlinked – are today the main inhibitors to further inclusive and sustainable growth in the region (OECD et al., 2019[3]).

A recovery based in decarbonising investments and climate mitigation and adaptation policies could promote a more competitive productive matrix, boost job creation and enhance social inclusion (Chapter 3). Most LAC countries adopted measures to respond to the impact of the COVID‑19 crisis. For the recovery, further actions are needed to advance towards a more sustainable, resilient and sustainable development model. Advancing sustainable production and consumption patterns and improving the quality and coverage of social services is key for the recovery (ECLAC, 2022[46]).

Combining adaptation strategies with social and economic dimensions through a systemic lens could help overcome the region’s development traps. A systemic design of the green transition could be a way to address the unavoidable trade‑offs presented by any transformative transition. Confronting climate change is not the only reason for advancing decarbonisation efforts. It can also contribute to stronger public institutions, as governments could increase policy coherence and deliver a more just society based on a new sustainable social contract. If properly designed, a green transition can also help increase the overall well‑being of LAC citizens (Chapter 5). A systemic approach with a multi‑dimensional perspective could transform the COVID‑19 recovery into an opportunity to advance a more sustainable and inclusive development model. Setting green policies at the centre of the recovery ensures countries invest in sustainable long‑term economic models, while making the best of the growing international green agenda (Chapter 6) and its emerging market opportunities and various investment and financing initiatives (IPCC, 2021[7]).

Integrating social dimensions into the green transition is key for a better development model

Close interaction between humans and their environment highlights the need to address the challenges of inequality and environmental degradation together (OECD, 2021[51]). If not addressed, the effects of climate change will continue to deepen poverty and inequality in the region. The green transition has the potential to help LAC address all dimensions of inequality, across countries, socio‑economic groups, territories, generations and gender.

Both climate change and inequality are pressing issues demanding integrated solutions at the subnational, national, regional and international levels. Climate change exacerbates inequalities within societies and also among countries. Developing countries face a kind of “double asymmetry” in the sense that those who produce the most emissions (the richest countries and social groups) have the greatest capacity to defend themselves against the effects of climate change, while those who produce the least emissions (the poorest countries and social groups) suffer the most and have the least resources to recover (Tambutti and Gómez, 2020[23]; OECD, 2021[51]; ECLAC, 2020[52]). The first asymmetry stems from the fact that the level of emissions reflects consumption capacity and therefore reproduces patterns of income inequality (Figure 2.6). The second asymmetry is derived from unequal distribution of the cost of environmental degradation. The rise in temperature has affected poor countries (Tambutti and Gómez, 2020[23]) and their poorest social groups in particular. After Hurricane Mitch (1998) in Central America, low‑income households suffered larger relative loss of assets (31%) than the non‑poor (11%) (UNDESA, 2017[53]).

At the international level, the green transition offers a possibility to rebalance the disproportionate burden of climate effects on LAC and developed countries through stronger international co‑operation (Chapter 6). If national efforts are not co‑ordinated internationally, the speed and effectiveness of mitigation and adaptation policies adopted globally, particularly in the developing world, will continue to prove insufficient (Chapter 6) (IPCC, 2018[1]).

At the regional level, the green transition presents several opportunities to promote better collaboration and integration within LAC. The effects of climate change are also aggravating inequalities among LAC countries. Regional co‑operation can help improve data and information generation, water resource management, sustainable production and consumption, and biodiversity management. Regional initiatives based on active co‑operation for a more green and just transition could help contain the most vulnerable groups. In LAC, sea level rise, droughts, flooding and wildfires will force people to migrate, exposing them to further vulnerabilities. In 2017, three million Caribbeans were forced to relocate due to the Atlantic hurricane season (Bleeker et al., 2021[36]). The effects of climate change are forecast to drive an estimated 17 million Latin Americans to migrate by 2050

(World Bank, 2021[54]). Relocation programmes co‑ordinated at a regional level would help anticipate and contain forced migration due to climate change and reduce unnecessary exposure to risk.

At the national level, a new sustainable development model could help reduce social inequalities across socio‑economic groups. The combined impacts of the pandemic and climate change deepen the urgent need for such a model. About 49.2% of the urban population in LAC is either poor or extremely poor (Bárcena et al., 2020[6]). The pandemic increased the number of people living below the poverty line in LAC and climate change is projected to contribute an additional 5 million by 2030 (Hickey and Wellenstein, 2021[42]). Governments should focus on protecting those most in need through targeted social programmes (Chapter 1). As climate change threatens to reverse global health gains of the past 50 years, national healthcare programmes could be an essential element of a more just green transition (Watts et al., 2015[55]; Landrigan et al., 2017[56]).

At the subnational level, environmental degradation is deepening disparities among urban and rural areas and its effects on most vulnerable groups. In some Latin American cities, high rates of socio‑economic residential segregation make people living in precarious neighbourhoods more susceptible to climate change effects and other phenomena, such as exposure to heatwaves. This exposure increases their health risks and vulnerability to extreme climate events as a function of their socio‑economic status (OECD et al., 2021[2]). High urbanisation rates and unregulated expansion of urban areas have pushed vulnerable groups to locate in high‑risk zones with deficient or non‑existent infrastructure, such as floodplains and landslide‑prone slopes. Those who live near highways or industrial sites are often exposed to high levels of air pollution. In Chile, for example, there is a pronounced difference in exposure to PM2.5 (particulate matter with a diameter of less than 2.5 μm) between Magallanes with the least exposure (5.9 µg/m3) and Aysén with the greatest exposure (41.9 µg/m3) (Figure 2.13). A systemic green transition will have to include urban designs that internalise how citizens from poorer areas experience the largest negative impacts of climate change while lacking the capacities necessary to adapt.

Notes: WHO AQC = World Health Organization Global Air Quality Guidelines. The mean population exposure to outdoor PM2.5 is calculated as the mean annual outdoor PM2.5 concentration weighted by population living in the relevant area, e.g. the concentration level, expressed in µg/m3, to which a typical resident is exposed throughout a year. The country “total” considers the country as a single entity to which each region contributes proportionally.

The LAC regional average is calculated by the Organisation for Economic Co‑operation and Development (OECD) based on the countries selected.

Sources: (OECD, 2021[38]); (OECD, 2020[61]).

12 https://stat.link/sl18ux

The effects of climate change on rural areas are particularly relevant for LAC. Agricultural activities are particularly sensitive to climate change, which is expected to produce changes in structure, yields and crop cycles. Certain crop cycles will probably speed up, which will alter the physical properties of the soil and the supply of water for irrigation, lead to greater evaporation and place greater stress on those crops (Bárcena, et al., 2018[58]). The region’s economy relies significantly on agriculture, either through subsistence production (comprising around 15 million smallholder farms in LAC and 20‑30% of the workforce in the Caribbean) or through large industries (CAF, 2014[28]). Changing rainfall patterns, droughts and extreme climate events are likely to worsen significantly during the next decade, implying greater vulnerability related to land labour and food and water security (IPCC, 2022[29]). The effects of climate change have direct impacts on rural productivity, which could increase poverty, particularly in Central America (IDB, 2021[57]), as real income is highly dependent on land use. Income declines not only because of reduced availability of fertile land dedicated to agricultural production and livestock but also because heat stress forces lower labour productivity. In most cases, the capacity of farmers to react and adapt to the effects of climate change depends on their wealth. In Peru, temperature rise has forced farmers to sell their livestock, move their crops into fallow land and include children in their farming activities to compensate for income deficits (IFS, 2018[59]).

The gender gap is also deepening in LAC, as women and girls are more vulnerable to the effects of climate change (OECD, 2021[60]). Women are the main food producers in developing countries and have higher dependence on natural resources. When it comes to planted food, the impact of climate change on land and water directly affects their harvests (IUCN/GGO, 2015[62]). This not only reduces the amount of food women can take home but also potential micro‑selling initiatives to gain financial independence from their couples. In extreme scenarios, the fall in agricultural production might even cause forced relocations. In the dry corridor of Central America, 62% of poor families depend on corn, beans and sorghum to survive – all products likely to become impossible to grow as temperatures continue to rise (Hickey and Wellenstein, 2021[42]). Women and girls, who also tend to be responsible for water gathering, cleaning and cooking, experience disproportionately the consequences of climate change. While poor water connections and droughts impose greater distances and time to search for water, floods and hurricanes increase the exposure to risk situations (OXFAM, 2018[63]).

The income gap and the uneven distribution of domestic labour deepen the impact of climate change for women, as their lack of access to resources or their greater burden of domestic care activities hampers their capacity to recover quickly after a climate‑related natural disaster. As women are likely to be responsible for staying home and taking care of children out of school and injured family members after a hurricane or flooding, they have more chances of losing their jobs or suffer a reduction in their wages. Moreover, women are less likely to be employed in “cash for work” programmes implemented after a disaster to rebuild infrastructure (Bárcena et al., 2020[6]). Additionally, in the context of stressful events, such as climate disasters, the level of domestic violence and street aggression against women rises (IPCC, 2018[1]). Green policies should promote and ensure the development of new skills in future green jobs for women and encourage their involvement throughout the decision‑making process for policy to ensure an inclusive response (Chapter 5) (IPCC, 2018[1]).

Climate change also has unequal effects across generations. Nearly 60% of countries had an increase in the number of days people were exposed to very high or extremely high fire danger in 2017‑20 compared to 2001‑04, and 72% of countries around the world had increased human exposure to wildfires across the same period (Romanello et al., 2021[64]). By 2050, the population over 65 years will double in Latin America, increasing the number of elderly people who are vulnerable to heatwaves and other consequences (CAF, 2020[65]). Exposure to extreme heat poses a health hazard, particularly risky for individuals older than 65 years, populations in urban environments, and people with health conditions. Heat disproportionally affects people who are marginalised or with scarce resources, because they have limited access to cooling mechanisms, fresh water, and health care (Romanello et al., 2021[64]). An active, green education strategy is key to ensure that future generations envision and interact differently with the environment (Vona, 2021[66]), having learned from the experiences of current approaches to production and consumption.

Negligent land use and deforestation will have effects on how much each generation will benefit from a clean and safe environment. Forest land cover in LAC decreased by 8.2% between 2000 and 2020 (World Bank, 2021[21]), meaning that future generations will enjoy less green capital. The region has an important role in preserving forests, being home to 23% of the world’s forests including the Amazon, the world’s largest rain forest which is shared by eight countries. These ecosystems are key for climate change mitigation and adaptation due to their capacity to absorb CO 2. They also provide environmental services by regulating the water cycle, protect soils, supply resources such as timber, medicines, food and fibres, and provide opportunities for recreation and tourism. More than half of the world’s forest area is distributed in just five countries, with Brazil being the world’s second more forested. While most LAC countries suffered a significant net loss, Chile and Costa Rica increased their forest area between 2000 and 2020 (Figure 2.9). After a long period of forest loss last century, Costa Rica implemented recovery and reforestation policies and has managed to increase forest cover replacing land previously used for farming and livestock activities (ECLAC, 2021[20]). In Chile, massive exploitation of primary forests and extensive agricultural areas in places with high rainfall were eroding volcanic soils generating problems of stability and water quality. Policies implemented since 2015 focus on the conservation of natural forests, and have encouraged large forest companies to take action in rural development and funding fire prevention which has translated into the recovery of forest land (European Forest Institute, 2019[67]).

Harnessing the green transition through a systemic approach to improve well‑being

The wide range of post‑COVID‑19 recovery strategies have shown several frameworks that can be adopted to build forward better. Each country’s conception of recovery prioritised different economic, social or environmental goals and the best strategies to achieve them. How this policy priorities are conceived and aligned, determine the kind of recovery pathway adopted. Each recovery pathway distinguishes itself in the way in which each encompass GHG emission reductions, and integrates these with considerations for wider well‑being outcomes (e.g. SDGs) (OECD/IEA, 2021[13]). Globally, how the recovery is designed and implemented will determine how inclusive the transition could be.

The Rebound path disassociates the recovery from the environment and focuses solely on the economic recovery and measures to attain the pre‑crises economic indicators such as GDP, job creation, firms’ profits or trade rates. Even though this approach might have put certain economies back on track, they have also reversed much of the environmental progress gained during the previous years in terms of GHG emissions or clean air. The Decoupling strategy also conceives recovery in terms of growth and production, but unlike the rebound path, places the mitigation strategy in the centre of its efforts. It aims to decouple the economic growth from the CO 2 emissions associated with it, through initiatives such as energy efficiency or transition to low carbon energy. Nevertheless, this green growth does not conceive the recovery as an opportunity to shift towards policies and consumer patterns that place well‑being as their central focus.

A well‑being approach advocates for an economic recovery low on emissions and centred in well‑being improvements. From this lens, GDP growth may not necessarily be a means to increase current nor future well‑being and should not be used as the aggregate measure of progress.12 LAC countries should especially beware of taking a recovery pathway focused on maximising GDP growth at the expense of environmental degradation and without placing other wider well‑being impacts (e.g. health, equity) at the centre of decisions (as would be reflected in a Rebound pathway). Under a wider well‑being recovery path, the focus is no longer on greening GDP growth (as in a Decoupling pathway), but on designing systems in ways that increase well‑being while reducing emissions and material use. In practice, it means enabling the conditions that make sustainable choices the easiest and cheaper and thus those that people choose. This beyond‑GDP systemic vision aims to redesign systems to achieve better results. Through a well‑being pathway, policies no longer focus on solving specific problems but on designing systems that do not generate those problems in the first place.

A green transition approach specific to LAC should place citizen’s well‑being at the centre and account for the particularities of the region. The path towards zero emissions should not be constrained to other region’s strategies, but rather it should be the result of a comprehensive analysis of how to make the transition without hampering the region’s development opportunities. The “common but differentiated responsibilities” approach and the Glasgow Pact (which commits developed countries to provide USD 100 billion annually to developing countries by 2030), are two important elements to advance global climate justice. Since colonial times, history shows the consequences of not putting Latin American resource preservation and citizens well‑being at the centre of decision‑making

2. Harnessing tHe potential of tHe green transition to build a more inclusive development model processes. Following the principles of climate justice, LAC should pursue a transition in which the burden of climate change is properly shared by the most developed countries and regions (Figure 2.1). Moreover, a Latin American approach to the green transition should focus on reducing the emissions of citizens who consume and pollute the most, usually those in the upper quintile (Figure 2.6).

A well‑being approach for the green transition implies addressing the challenges of placing Latin Americans’ well‑being at the centre (OECD, 2021[38]). Since 2011, the OECD has been promoting a well‑being framework that provides a comprehensive approach to analysing and measuring the determinants of current and future well‑being, beyond aggregate traditional measures, such as GDP (OECD, 2021[38]). This approach encompasses multiple dimensions that determine people’s current well‑being (e.g. income and wealth, work and job quality, housing, health, knowledge and skills, safety and the quality of the environment) and proposes a broader set of indicators to track performance and guide decision making. To analyse the dimensions of current well being, it measures well‑being outcomes by looking at averages, deprivations, and inequalities between groups and between top and bottom performers. Then, it measures the stocks, flows, risk factors and resilience of resources that will determine the well‑being of future generations (e.g. natural, human, economic and social capital) (Figure 2.14).

Source: (OECD, 2021[38]).

This well‑being approach should be considered for developing national statistics, policies and promoting recognition of multi‑dimensional well‑being – e.g. measuring all dimensions, beyond income, that affect people’s well‑being (OECD, 2021[38]). Measuring well‑being through inequalities often reveals wide variation between and within countries. In the context of environmental policy, looking beyond averages is particularly relevant as the impacts of environmental degradation are often concentrated among vulnerable groups and households (OECD, 2021[51]). In addition, a well‑being approach calls for reframing measurement systems around well‑being outcomes (e.g. improved learning outcomes) instead of focusing on intermediate outputs (e.g. increased education coverage) (OECD, 2019[68]).

Delivering systems that can, by their design, improve well‑being while reducing energy and material use, and therefore emissions, calls for policy‑making that is able to understand and reshape current unsustainable systems. Analytical rather than systemic approaches are usually pursued, leaving governments ill‑equipped to design effective climate change mitigation and adaptation action. An analytical approach consists of solving problems by dividing them into parts and trying to optimise those parts. For example, countries make significant efforts to improve the energy efficiency of or to electrify vehicles (a part in the transport system). Such efforts focus on reducing the undesired output (e.g. emissions) per unit of output (e.g. kilometres driven). Evidence shows, however, that the increase in the overall number of vehicles and the kilometres driven (pushed by the functioning of car‑dependent systems) offset the emissions reduction obtained via such policies (Lamb et al., 2021[69]).

Complex problems, such as climate change or poverty, are rarely caused by specific parts in a system but instead by the way parts are organised and interrelated. Partially blind to the system that generates the results their policies aim to change, analytical approaches are prone to making assumptions about certain trends or behaviours. For example, analytical thinking led to decades of transport policies that assumed an increase in the number of vehicles in circulation and the congestion generated as inevitable consequences of progress. Transport policies therefore focused on increasing road capacity but ended up exacerbating congestion and directly affecting climate action.

With a systemic lens, climate action is no longer limited to reacting to or anticipating inevitable trends. Rather, it gives the opportunity to modify trends via (re)designing systems that are behind such trends. Furthermore, when policies are designed with a systemic lens, what used to be trade‑offs between climate and well‑being objectives may become synergies (OECD, 2019[68]).

The OECD supports the adoption of a systemic approach to help policy makers reprioritise climate action towards improving system functioning and accelerating the transition to systems that are net zero by design (OECD, 2021[70]). The OECD has developed the Systems innovation for net‑zero process,13 which builds on systems thinking and consists of three steps:

1) envision the outcomes that a well‑functioning system achieves;

2) understand why the current system is not achieving such outcomes, which mental schemes support such a system and how it could be redesigned to produce better results; and the outcomes that a functional and sustainable system would achieve. the key dynamics underlying undesirable results, and identify key stakeholders and barriers to system change.

3) identify policies able to transform or (re)design systems (Figure 2.15). This model could serve as a framework for policy makers designing and implementing green transitions, while underpinning the importance of policy coherence across multiple dimensions and time periods (Chapter 5).

RE(DESIGN)

systems via policy packages focused on reversing unsustainable dynamics. As needed, modify governance, budget allocation, and monitoring frameworks so that they enable and are conducive to system change.

Source: (OECD, 2022[71]).

Thinking in systems for sustainable territorial development

The urbanisation process in LAC has had favourable economic and social consequences, such as greater dynamism in production activities, development of services, increased productivity and harnessing economies of scale (ECLAC/MINURVI/UN‑Habitat, 2017[72]). However, the lack of a systemic approach has also given rise to negative impacts such as air pollution and GHG emissions, road congestion and accidents, health problems, and water pollution, all of which are eroding the foundations of economic dynamism (Bárcena et al., 2020[6]).

Air pollution is the world’s single largest environmental health risk (UNECE, 2021[73]). Of its components, PM2.5 has the highest health impacts. Although PM2.5 emissions are, on average, lower in LAC cities than in Southeast Asia or North America, levels have been rising faster lately (Florczyk et al., 2019[74]). As Latin American cities grow, their pollution levels are increasing (Gouveia et al., 2019[75]). In general, CO 2 emissions have been growing faster than populations in cities, resulting in increased CO 2 per capita across the region.

The percentage of people living in urban areas in LAC has doubled since 1950 (UNDESA, 2019[76]). South America is the most urbanised subregion in LAC (84.6%), above the high‑income countries group (81.9%). Slightly lower in Central America (75.4%) and the Caribbean (72.2%) are still much higher than other developing regions including Sub‑Saharan Africa (41.4%) and Southern Asia (36.6%) (Figure 2.16). The Caribbean has experienced the greatest increase in urbanisation, from 36.3% in 1950 to 72.2% in 2020. In particular, the countries with greater urbanisation increases are the Dominican Republic (from 23.7% to 82.5%) and Haiti (from 12.2% to 57.1%) (UNDESA, 2019[76]). The Caribbean’s fast urbanisation has had direct impacts on the environment. Most urban, industrial and commercial developments did not follow sustainable urban design. Activities, including tourism and its infrastructure, have thus contributed to destruction of natural habitat, landscape transformation and coastal erosion (Ecosystem Profile, 2019[77]). Many metropolitan areas in LAC, including their residents and infrastructure, that experienced rapid urbanisation now face significant climate‑related risks, such as flood plains or slopes prone to landslides. Such risks are projected to increase in the future (IPCC, 2022[29]).

Figure 2.16. Global urbanisation trends, 1950 -2050

Notes: Available data until 2018; from 2020‑50, the values are forecasts. Urbanisation trends refers to annual percentage of population at mid‑year residing in urban areas. The country classification by income level is based on 2016 GNI per capita from the World Bank.

Source: Authors’ elaboration based on (UNDESA, 2018[78]).

12 https://stat.link/10iox2

Car-dependent territories with high sprawl perform poorly in terms of well-being

Transport is one of the main sources of air pollution and high GHG emission levels, mainly due to the large size of many LAC countries. In Latin American cities, private motorised transport is responsible for 75% of CO 2 emissions and produces 82% of PM10 pollutants, both of which are negatively associated with health outcomes (Vasconcelos, 2019[79]). Moreover, the Caribbean, land‑based transportation accounts for the second‑largest share of fossil‑energy consumption. The subregion has one of the highest vehicle motorisation rates in the world, with 201 vehicles per 1 000 inhabitants. In Latin American and Caribbean countries, the urban layout and the availability and quality of public transport influence automobile use and shape car dependent and sprawled territories (ECLAC, 2020[52]). This concept refers to the dynamic by which people move away from city centres but still commute daily to such centres. To a great extent, this is the result of decades of short sighted transport and spatial planning policies (or sometimes the lack of these policies). While this section focuses on transport, a systemic approach can be applied to other sectors in LAC countries. Applied to the residential sector, for example, a systemic approach can shed light on the drivers of urban sprawl (why people “choose” to move further away from city centres) and thus inform policy decisions aiming to contain such development.

Car‑dependent and sprawled territories perform poorly in terms of present and future well‑being of citizens. Undesirable results include traffic congestion,14 growing inequalities, poverty perpetuation, road fatalities, high emissions, air pollution and reduced capacity to adapt to climate change. Peripheries host most of the low‑income settlements (ITF, 2019[80]; IDB/ITF, forthcoming[81]), and after decades of transport investment heavily biased towards highways (ECLAC, 2020[82]; Lardé, 2021[83]; Sanchez et al., 2017[84]), these areas lack proper public transport infrastructure, preventing the most vulnerable groups from easily accessing labour (ITF, 2020[85]). For example, for a similar trip duration, inhabitants of peripheries of Bogota have access to four times less job opportunities by public transport (around 20 000 jobs) than people living in the city centre (IDB/ITF, forthcoming[81]). Moreover, the predilection for highways is directly detrimental to the well being of citizens since, of all modes of transport, highways have the highest

Harnessing tHe potential of tHe green transition to build a more inclusive development model

CO 2 emissions (between 55 and 256 grams per tonne kilometre), a figure much higher than maritime transport (between 11 and 101), river transport (between 17 and 38) and rail transport (between 2 and 21) (ITF, 2022[87]).

The infrastructure of many cities in Latin America prioritises mobility by car, making it the transport mode that provides higher access to opportunities compared to other transport modes such as public transport. In Mexico City, car users can reach 13 times as many people (representing essential opportunities) in 30 minutes than public transport users, and 20 times as many people if informal public transport is excluded. In Bogota, cars also provide access to a significantly higher number of people than other modes of transport (Figure 2.17) (ITF, forthcoming[86]). In comparison, access to opportunities in cities such as London and Paris is relatively similar regardless of the transport mode used, showing higher effectiveness of the transport system and better urban planning. In LAC, low‑income households that are unable to afford cars15 are “captive users” of public transport (and, most recently, motorcycle use); they spend more time traveling than higher income households able to afford cars, face unsafe travel conditions and may need to pay various single tickets per commute. In Brazilian cities of more than 60 000 inhabitants, the average commuting time in public transport is 36 minutes – more than double the 15 minutes the same trip would take using individual transport (Vasconcelos, 2019[79]).

Notes: The number of people accessible in 30 minutes within an 8 km radius is used as a proxy for the number of opportunities a person can access with each transport mode (ITF, forthcoming [86]). The figure illustrates the differences in access to opportunities via different transport modes within cities. The population density and total area vary across cities, which in turn affects the number of people that can be reached in 30 minutes within an 8 km radius. The area of each city refers to the Urban Centre, which is usually larger than the administrative city. It is suggested that the data be interpreted comparing transport modes within not across cities.

Source: (ITF, forthcoming[86]).

12 https://stat.link/58wtd0

Car‑dependent and territories with high sprawl also perform poorly in terms of environmental sustainability and adaptation, which also has negative impacts on future well‑being of citizens. High vehicle ownership results in disposal of used oils, tires and expired vehicles, which pollutes natural and coastal waterways and increases the use of scarce land for landfilling (ECLAC, 2021[25]). Car‑dependent and sprawled territories are also very difficult to decarbonise. First, rapidly growing private car and motorcycle use will offset emissions reduction from cleaner vehicles (Lamb et al., 2021[69]). Second, decarbonisation is costly and slow as it implies incentivising the shift of large fleets of vehicles towards cleaner technologies. Third, efforts to decarbonise car‑dependent and sprawled cities can lead to trade‑offs between climate and other well‑being outcomes such as equity, making them politically unattractive. Fourth, trade‑offs between climate actions and wider environmental goals may hinder across‑government collaboration. Sprawled territories also reduce the capacity of urban agglomerations to adapt to climate change. They are space‑intensive, and dedicate most public space to car use,16 reducing space available for green areas in cities (necessary to cope with heatwaves) and/or leading to built‑in development expanding into natural ecosystems that formerly provided ecosystem services (such as water absorption to cope with floods).

Three vicious cycles to revert

As cities expanded, resources for public (especially mass transit) and active transport modes have lagged, especially outside of capital cities. Deregulation of public transport services in the region during the 1980s has also contributed to the erosion of public transport service, as profits were prioritised over maintenance, service expansion and upgrades.17 In parallel to the prioritisation of infrastructure for car use, single‑use development has been the norm in spatial planning. Both low‑income social housing and high‑income closed neighbourhoods are now concentrated in city outskirts, far from services and activities and often with lower density than in city centres – which drives up car dependency. Such policy prioritisation has led to transport and urban systems organised around car driving and is largely driven by three unsustainable and interconnected dynamics: induced demand, urban sprawl, and the erosion of active shared modes of transport (Figure 2.18). These dynamics are at the source of increased car use in the region. Between 2007 and 2014, private vehicle ownership increased by 35% in LAC (CAF, 2016[88]) – a trend that is still observed in the region and in other areas of the world.

Induced demand refers to the phenomenon by which public investment in roads for car use ends up causing more, rather than less, traffic congestion. The dynamic works like this: public investments in road capacity for car use (1) play a major role in fostering urban sprawl. As road capacity for cars (2) increases, so does the catchment area (7). Induced demand occurs when public investment in roads for car use ends up causing more, rather than less, congestion. As mapped out in Figure 2.18 public investment in roads for car use (1) leads to increased road capacity for cars (2). While the intended objective of these investments is to reduce travel time (and thus congestion) (3) they end up having the opposite effect. As travel time (congestion) (3) by car is reduced, the attractiveness of driving and owning a car (4) increases, inducing people to “choose” cars over other modes, and causing traffic volume (5) to increase. As traffic volume (5) goes up, so does congestion (3) leading to public pressure (6) on policymakers to reduce congestion. Most countries have responded to this pressure by investing further in road capacity for cars (1), which restarts the cycle, rather than solves the problem.

Both induced demand and urban sprawl exacerbate the erosion of public transport and active modes, the third vicious cycle at the source of increased car use and emissions. As more and more people are induced to drive cars, and as policymakers respond to that “choice” by further increasing the road capacity for cars (2), traffic volume (5) of motorised vehicles increases as does the space and funding allocated to these modes. Unsurprisingly, in such systems, the attractiveness of public transport and active modes (8) is low: public transport often takes longer and provides less access to places than driving a car and riding a bike is not safe.

Taken together, these dynamics lead to territories in which most people need to travel long distances daily and private cars or motorcycles are the most attractive options for the bulk of these trips. As a result, these are the modes most people “choose” as soon as they can afford them. Understanding the dynamics above allows policy makers to see that this “choice” is not really an individual preference but the result of the systems design.

Applying a diet analogy, “unhealthy” transport systems are those in which most people use motorised vehicles (the sugar and fat in the diet analogy) for most of their trips (Figure 2.19). “Healthy” transport systems are those in which people can access places by walking, cycling and using micro‑ or shared mobility for most trips while high‑emitting and space‑intensive modes are used less frequently. Such a “diet” is possible thanks to:

1) the proximity between people and places; and

2) public space and investment being allocated to privilege active and shared modes, such that they are the most convenient and people choose them most often. By design, the “healthy system” needs less energy to function and has lower emissions, yields lower mobility but high accessibility,18 offers more equitable and safe access to opportunities and promotes healthier lifestyles.

Policies to transform territories and get to better environmental and well-being results

LAC countries need to focus efforts on policies that can transform their transport systems away from car dependency. Two of these policies are the following:

Public space reallocation is a key policy to revert the dynamic of induced demand and has also the potential to contain urban sprawl and the erosion of active and shared modes (Figure 2.18). Rebalancing space use between modes and uses could lead to “disappearing traffic”, the opposite phenomenon than the increase in the use of cars and motorcycles experienced in LAC. Barcelona’s superblocks are a good example of a wide scale plan for road space reallocation and street redesign, implemented with climate and well‑being ambitions in parallel. Barcelona’s superblocks restructure the city into polygons of 400 m x 400 m with inner roads closed to motorised vehicles. The superblocks become spaces welcoming active modes (walking, cycling) and recreation (Ajuntament de Barcelona, 2014[89]). Superblocks are often referred to as low‑cost urbanism; they have demonstrated great potential to transform the urban ecosystem and bring about health, safety, social and environmental benefits in the short run (López, Ortega and Pardo, 2020[90]). Parking policy (e.g. through parking pricing and regulation) is also crucial to public space reallocation aligned with environmental and social goals. In Mexico City, minimum parking requirements that forced developers to build a minimum number of parking spaces in each project were abolished in 2017 and replaced with maximum parking requirements as a way to limit the space allocated to cars (Ciudad de México, 2017[91]). As part of this legal reform, minimum parking requirements for bicycles were also introduced (Guzmán, 2020[92]). While there are good examples in the region, road space reallocation and street redesign need to be implemented at a wide scale and across territories; and be prioritised in climate strategies.

Policies to mainstream shared mobility (including active modes and micro‑mobility) are fundamental to reverse the erosion of active and shared transport modes and accelerate the development of multimodal and sustainable transport networks. Support19 to mainstream shared bicycles and micro‑mobility, as well as the expansion of on‑demand micro‑transit services can significantly increase the attractiveness of sustainable alternatives at a much faster pace than if solely focusing on existing public transport services. The development of digital tools will be key to harnes shared mobility. Global

Harnessing tHe potential of tHe green transition to build a more inclusive development model

Positioning System (GPS) technologies and apps today allow people to share vehicles (e.g. bikes) and rides and combine transport modes in cost‑effective ways. If used for this purpose, these technologies could allow the shift from a system which requires car ownership to systems in which a multiplicity of transport modes (including shared electric cars) are available for people to choose from and combine according to particular needs. Importantly, increasing the feasibility and attractiveness of these modes will highly depend on the road space reallocation (discussed above) away from private car use. Thus, there is a high potential for change if implementing these two policies (mainstreaming of shared mobility and road space reallocation) in tandem.

The GHG emissions of the region’s transport sector relative to GDP are 2.2 times as high as in Europe and 1.3 times as high as in Asia, which means there is ample scope to increase carbon efficiency (ECLAC, 2020 [82]). If a better balance were achieved with electric railway transportation, the environmental performance of cargo transport would improve, while at the same time enhancing the competitiveness and flexibility of the sector. Decarbonising the transport sector in the region would also create 4 million new jobs in heavy vehicle operation and maintenance activities and more than 1.5 million in the light vehicle industry (UNEP, 2019[94]).

Implementing transformative policies can also increase the effectiveness and feasibility of other policies (e.g. carbon and road prices), which can help accelerate the transition towards systems that are sustainable by design. Moreover, electrifying transport will be more effective and rapid in a system that is no longer based on private vehicle ownership and use, but rather increases the participation of modes (e.g. micro‑mobility, public transport) that are more resource efficient and which, as discussed in (IPCC AR6 WGIII, 2021[93]), have already a higher penetration of electric vehicles.

Infrastructure investments should shift away from hydrocarbon based transport modes towards transport modes that allow for multimodal distribution. This could also lead to a reduction of negative impacts on ecosystems, a reduction of emissions and a better protection of biodiversity, among others. Transformative policies are especially relevant for small and medium sized cities in LAC. As these cities are still expanding, early interventions that address the vicious cycles (Figure 2.18) can make these agglomerations sustainable by design, avoiding carbon lock in and improving their climate resilience (OECD, forthcoming[96]).

The region is well placed to produce the material basis for electric mobility. Three countries are major car manufacturers: Argentina, Brazil and Mexico. The Brazilian automotive industry accounts for 5% of GDP and employs 500 000 people directly and 1.3 million indirectly. In Mexico, the industry generated 3.7% of GDP and employed 824 000 people directly in 2017. In addition, three countries in the region, Argentina, Chile and Bolivia, have the world’s largest reserves of lithium, and there are areas that are very well endowed with solar and wind energy that would allow hydrogen to be generated at very low costs. Chile and Peru also have large reserves of copper, a metal that is more in demand for the manufacture of electric vehicles than those with internal combustion engines (Chapter 3) (ECLAC, 2020 [82]).

Recovery pathways from a systemic lens

Focusing COVID‑19 recovery on low‑carbon strategies that set the basis for a systemic transformation could accelerate the transition towards transport systems based on renewable energies, able to simultaneously reduce income inequalities and emissions. The transport and residential sectors are determinant for the region’s current and future energy consumption, emissions and well‑being (IDB, 2016[95]); yet there is little focus on them on recovery packages. Principally, recovery packages have been mainly focused on recovering employment and compensating the loss of household revenues (OECD et al., 2021[2]). Although these policies are fundamental to offset the COVID‑19 crisis, moving forward requires holistic recovery packages that address the structural causes of social and economic vulnerability as well as the already‑existing climate challenges.

The following tables categorise transport and residential sector policies found in different LAC country recovery plans20 according to the three recovery pathways: Rebound, Decoupling and Wider well‑being. The tables assess whether the transport and residential sector policies align with the Wider well‑being pathway or rather are locking countries into less effective development pathways (Table 2.1 and Table 2.2).

Table 2.1. Rebound, Decoupling and Wider well-being pathways for the transport sector

Transport

Selected recovery policies implemented

Rebound: fostering car‑dependency

The focus is on boosting economic growth, jobs and disposable incomes by maintaining and reinforcing car‑dependent systems. The policy rationale maintains a “traditional vision” of mobility – e.g. physical movement and speed – as central performance indicators for the sector. It also reflects the belief of a positive correlation and virtuous cycle between transport volumes and GDP as the ultimate goal for the economy. Because the focus is on mobility, the role of proximity between people and places is ignored and mobility by car – a space‑ and carbon‑intensive mode – is privileged.

Chile: Containment of paraffin, petrol and benzine prices.

Panama: Infrastructure projects focused on highway improvement and enlargement.

Colombia: Project Concluir to finish the construction of 400 km across 27 road projects in 23 departments. Construction of 21 road sections for legality and reactivation in 18 departments.

Decoupling: promoting clean car‑dependency

The mind‑set is still around “supporting mobility for economic growth”. As such, the aim is not to transform transport systems but rather to decarbonise existing (e.g. car‑dependent and mobility‑intensive) ones. Mitigation efforts concentrate, to a great extent, on improving parts (e.g. vehicles and fuels), while maintaining current systems. Efforts focus on improving the energy efficiency and reducing the carbon intensity of the vehicle fleet (especially private cars) and the fuels they use, fostering improvement of vehicle technologies. As significant travel reduction and modal shift will not be main drivers of mitigation in this pathway, “shift” and “avoid” type policies and measures have a smaller role than “improve” actions.

Uruguay: Electric mobility solutions with major focus on electric private cars.

Panama: Definition of the National Strategy of Electro Mobility.

Wider well‑being: shifting away from car‑dependency while promoting clean vehicles

Wider well‑being shifts the focus from mobility to sustainable accessibility, opening the door to envision systems that significantly reduce emissions not only by reducing mobility, but also by increasing “proximity” and “access”. It places emphasis on reversing and shifting away from car‑dependency while simultaneously improving the vehicles that are still needed (e.g. public buses). It prioritises the use of space for space efficient and low/zero carbon modes (walking, cycling, micro‑mobility and public transport) while focusing important action on reallocation of road space and, in cases where policies have historically prioritised building infrastructure, redesigning streets for car use. Incentives for electric vehicles (EVs, including charging infrastructure) is provided and planned with the aim of embedding electrification in the wider aim of shifting away from a system based on privately owned cars with low occupancy.

Uruguay: Programme to increase the use of public and active travel (MOVÉS).

Argentina: Strengthen the metropolitan transport agency, extend Ecobici’s capacity, and reallocate road space in Avenida del Libertador (Buenos Aires).

Mexico: Permanent cycling path Insurgentes and substituting moto‑taxis with e‑bikes –Mobility project Tláhuac (Mexico City)

Colombia: Public Policy for Bikes 2021‑2039 (Bogota).

Chile: National Strategy of Sustainable Mobility and National Strategy of Electro‑mobility.

Sources: (Buckle et al., 2020[97]); (OECD, 2021[70]); (Gobierno de Chile, 2021[24]); (Gobierno de Panama, 2020[98]); (Greenpeace México, 2021[99]); (Gobierno de Buenos Aires, 2022[100]); (Alcaldía Mayor de Bogotá D.C., 2021[101]).

Two types of transport measures aligned with a rebound recovery pathway were the containment of energy prices, including fuels. These initiatives incentivise car use and emissions and use up resources that could bring better social and environmental value if used differently (Carlino et al., 2015[102]). The second measure found in Panama and Colombia’s recovery plans is further investment in the improvement and widening of car purposed infrastructure (e.g. highways). Panama’s electro mobility strategy was found to be consistent with a decoupling type of recovery, aiming to electrify 10‑20% of private vehicles and only 15‑50% of public buses, but doesn’t transform the system’s demand maintaining the prevalence of private car use vs. electric public transport.

2. Harnessing tHe potential of tHe green transition to build a more inclusive development model

Regarding wider well‑being, Chile’s National Strategy of Sustainable Mobility follows this pathway as it aims to achieve a better use of energetic resources, time, and road and urban space. It plans infrastructure projects to prioritize active transport and massive public transport over private transport. City level recovery policies stand out for being in line with the wider well‑being pathway. Among these are programmes to incentivise bike‑use while also improving streets for its safe and convenient use (including by increasing cycling lanes and parking), like in Bogota, Santiago, and Buenos Aires. In some cases, cycling lanes introduced during COVID‑19, have been made permanent (Buckle et al., 2020[97]), as in Mexico City with Insurgentes Avenue (Greenpeace México, 2021[99]).

Table 2.2. Rebound, Decoupling and Wider well-being pathways for the residential sector

Residential

Selected recovery policies implemented

Chile: Subsidies to limit the rise of gas prices.

Rebound

The focus is on stimulating short‑term growth and employment opportunities in the construction sector. The vision of the sector is narrow and thus concentrates on the scale of the dwelling or building (focused more on delivering housing than on its quality), disregarding location or the wider living environment (e.g. surrounding areas or services and connections around the dwelling). Also focuses on short‑term – and especially private – costs and benefits, disregarding full‑cost accounting of wider and longer‑term well‑being costs and benefits.

Panama: Support for first house purchase for lower income households (Fondo Solidario de Vivienda, with no energy efficiency or quality standards.

Peru: Financing for construction of households and public spaces, but with no energy efficiency or quality standards.

Colombia: Subsidies to interest rates for the financing of new urban housing, but with no energy efficiency or quality standards.

Decoupling

The main objectives are to foster growth and provide “access to shelter” while also decreasing emissions from energy use. Most efforts focus on attaining energy efficiency gains in buildings/dwellings. As in the case of Rebound, the scope of focus is narrow. Thus, Decoupling does not look beyond the dwelling and misses on options to reduce energy use by modifying the surrounding environment (e.g. use of greenspace to regulate the micro‑climate, thereby reducing cooling needs). Decoupling does not integrate full‑cost accounting; thus, while some deep retrofits may be pursued, these do not become the norm. Rather most efforts focus on shallow retrofits.21

Colombia: Programmes to replace home appliances with more efficient ones.

Panama: Design of Sustainable Building Regulations and the National Cooling Plan.

Wider

Well‑being

This pathway considers housing as a “bundled good” that should deliver a number of functions beyond access to shelter. It prioritises measures that reduce emissions in the residential sector while also facilitating emissions reduction in other sectors. It puts emphasis on new builds and retrofits that substantially lower energy demand (e.g. passive houses)22 and are potentially accompanied with low‑carbon energy generation (e.g. rooftop solar). Full‑cost accounting is embraced by public and private actors, mainstreaming considerations (short‑ and long‑term) on health and wider well‑being when evaluating projects. Wider well‑being also takes into account the need to lower energy demand by considering the surrounding environment (e.g. housing location and transport connections, existence of green space to regulate the microclimate and reduce heating or cooling energy needs).

N/A

Sources: (Buckle et al., 2020[97]); (Gobierno de Chile, 2022[103]); (Departamento Nacional de Planeación, 2021[104]); (Gobierno de Panama, 2020[98]); (El Comercio, 2020[105]).

In terms of the residential sector, two types of measures were found to be aligned with a rebound type of pathway: subsidies for gas prices and housing programmes or subsidies in Panama, Peru, and Colombia that did not include any considerations of efficiency standards, nor quality of the dwelling nor the surroundings; including location and transport connections by sustainable modes, which can easily result in further fostering sprawl (Buckle et al., 2020[97]; OECD, 2021[70]). Colombia implemented a programme consistent with a Decoupling pathway, focused on identifying inefficient appliances and supporting the population in replacing them. Panama recently designed Sustainable Building Regulations that aim to save 15% of energy use in the construction of new buildings in the following two years and up to 20% in subsequent years. No recovery policies were found to be aligned with a wider well‑being pathway.

Overall, revisiting recovery policies in the light of a systemic approach would be relevant for the region. In certain cases, a same country was found to implement recovery measures that align with different pathways. The risk of this is that investments will result in policy incoherence and conflicting goals not aligned with a sustainable and inclusive model. The recovery pathways here presented can serve countries as a guide to rethink the policies included in their recovery packages and redesign strategies that address social, economic, and environmental issues at the same time. If conceived systemically, investments in transport and urban systems could play a crucial role in improving well‑being while also contributing to long‑term collective climate goals.

Key policy messages

The green transition is a structural challenge that LAC will have to face eventually. The rising emissions coming from LAC, and the disproportionate effect that climate change has in the region and on its most vulnerable groups, are evidence of how urgent it is to address a green and just transition. At the same time, LAC is better positioned than other regions in the world to adopt a more sustainable and inclusive economic model, given the richness of biodiversity and potential for renewable energies.

The post‑COVID‑19 context presents itself as an opportunity for governments to align the objectives of the recovery with those of a green transition, looking beyond GDP and placing Latin American and Caribbean’s well‑being at the centre. A truly just transition should help close the existing social gaps that characterise LAC and avoid generating new ones. A systemic approach should guide active mitigation and adaptation policies that could help reduce inequalities across countries, socio‑economic groups, territories, generations and genders. In this regard, the articulation of preventive climate change and risk management policies with universal, integral, resilient and sustainable social protection systems is key for a systemic and multi dimensional approach.

Governments should focus on reversing unsustainable dynamics and transform territories into systems that, by their functioning, allow a sustainable and just society. With a systemic lens, governments could foster various trends by (re)designing systems able to improve people’s well‑being while requiring less energy, producing fewer emissions and transforming what used to be trade‑offs between climate and well‑being objectives into synergies.

Box 2.1. Key policy messages

• Adopt a recovery strategy based on low emissions and centred on well‑being in LAC. Make use of lessons learned from recovery pathways to refocus policy decisions towards improving citizens’ well‑being and advancing transformative policies. The path towards net zero emissions should not be limited to follow other region’s mitigation and adaptation strategies, but rather it should be the result of a comprehensive analysis of how to achieve a green and just transition taking into account LAC and its subregions’ particular characteristics.

• Promote a systemic approach to reprioritise climate action towards improving systems’ functioning rather than focusing on improving parts (e.g. more highways for private car use) while keeping unsustainable systems (e.g. private car‑dependent territories). Some relevant actions are: designing and implementing climate, transport and land‑use policies focused on reversing the unsustainable system dynamics underlying car‑dependency (e.g. induced demand, urban sprawl and the erosion of share and active modes). Climate strategies that are focused on improving only specific parts fail to do so and are, as a result, ineffective in achieving emissions reduction at the pace and scale needed.

• Include the environmental dimension in education curricula to raise the environmental awareness among future generations.

• Invest in and develop data technologies and reliable information to better assess the complexity of mitigation and adaptation policies. To ensure a correct implementation and policy coherence in the short and long term, design systemic, sustainable decarbonisation strategies that address the particularities of each subregion and country in LAC. This will allow targeted programmes that include tailored solutions to reduce the GHG emissions at the sectoral level (e.g. transport, electricity, agriculture and livestock) while advancing holistic and cross‑cutting adaptation measures that connect local needs with global commitments.

• Strengthen further climate risk preparedness measures and multi‑hazard early warning systems, especially in the Caribbean. Gaining support from the international and the scientific and technological communities is essential to reinforce such systems.

• Identify the needs and characteristics of the communities and geographical areas most exposed to the negative impacts of climate change as a basis for strengthening climate resilience. Establishing climate risk repositories and risk maps, shared with all relevant stakeholders, is essential to inform climate change adaptation measures and prioritisation. These measures can help lower risk exposure of most vulnerable groups to climate change (e.g. women in rural areas).

• Identify the particularities and challenges of growing urbanisation in LAC to design more just, resilient and green cities. A greener economy should reduce urban pollution (particularly air pollution) and the exposure of the most vulnerable groups to their harmful health impacts. Sustainable and resilient city design should contribute to reduce coastal erosion and manage fragile coastal ecosystems to provide nature‑based solutions against the impacts of climate risks (e.g. coastal floods, hurricanes, sea level rise), especially in the Caribbean.

2. Harnessing tHe potential of tHe green transition to build a more inclusive development model

Notes

1. As defined by the Intergovernmental Panel on Climate Change’s (IPCC), “mitigation” constitutes human efforts to reduce the sources GHGs, while “adaptation” is the process of adjustment to actual or expected climate effects (IPCC, 2014[106]).

2. Whenever Historical GHG Emissions from Climate Watch (2022[14]) were used, the Climate Analysis Indicators Tool (CAIT) was chosen as the data source. The CAIT dataset is the most comprehensive on Climate Watch and includes all sectors and gases. In order to emphasise data comparability across countries, it does not use countries’ official inventories reported to the United Nations Framework Convention on Climate Change. Climate Watch Historical GHG Emissions are derived from several sources. The original source for the LUCF or agriculture indicators is FAO (2022[12]), FAOSTAT Emissions. For fuel combustion data, it is OECD/IEA (2021[13]), GHG Emissions from Fuel Combustion.

3. South America includes data for Argentina, Brazil, Bolivia, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela. Central America includes data for Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, and Panama. The Caribbean region includes data for Antigua and Barbuda, Bahamas, Barbados, Belize, Cuba, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, and Trinidad and Tobago.

4. See endnote 2.

5. GHG emissions excluding LUCF, to guarantee greater accuracy in comparisons.

6. See endnote 2.

7. See endnote 2.

8. See endnote 2.

9. See endnote 2.

10. The LAC countries ranked within the top 50 most vulnerable between 2000‑19 were: Bolivia (25), Colombia (38), Dominica (11), Dominican Republic (50), El Salvador (28), Grenada (24), Guatemala (16), Haiti (3), Honduras (44), Nicaragua (35), Puerto Rico (1), The Bahamas (6), St. Vincent and the Grenadines (48) (Germanwatch, 2021[26]).

11. See endnote 10.

12. As discussed in (Buckle et al., 2020[97]) while economic growth (expressed in terms of GDP) can be correlated with well being in some respects, this relationship may also be inexistent or negative in other ways. Taking GDP growth as proxy for success has led to high energy and material demand systems that do not necessarily deliver high well‑being, and increase the challenges to decarbonise at the scale and pace needed. This is why the highest GDP growth pathway is not necessarily the highest well‑being pathway.

13. The term “systems innovation” was coined around 20 years ago and can be defined as the application of a systemic approach to solve real‑world problems.

14. Several Latin American capitals feature among the most congested in international rankings (ITF, 2020[85]).

15. While 47% of rich households own at least one car, only 8% of low‑income families do (Daude et al., 2017[108]).

16. Around 80% of public space in cities is dedicated to car use according to (Mc Arthur et al., 2022[109]).

17. More recently, Mexico City, Santiago and Lima, among others, have attempted to re‑regulate public transport and expand services, especially through the introduction of bus rapid transit (BRT) systems, and initiatives to increase active modes have emerged in the region. While important, such efforts have not been able to counteract growing car ownership and use. One of the reasons for this is that they “fight” against the unsustainable dynamics illustrated in Figure 2.18 and Figure 2.19 and explained in this section.

18. Transport policy literature suggest that transport systems’ contribution to human well‑being lies on the provision of accessibility, i.e. on enabling ease of access to opportunities and places of interest (e.g. jobs, consumption, leisure or health services). Most transport systems today focus instead on the provision of mobility, which results in the car‑dependent and sprawled territories illustrated in this section. For more on this, see Chapter 2 of the report Transport strategies for net‑zero systems by design (OECD, 2021[70]).

19. Integrated transport subscription cards could facilitate the use of available options, and facilitate the provision of government subsidies to low‑income households if needed. Government subsidies may also foster the development of shared mobility in areas where private on‑demand services can bring social and environmental benefits but may not be

2. Harnessing tHe potential of tHe green transition to build a more inclusive development model profitable for the private sector. Support to the development of new vehicles (e.g. innovative micro‑mobility) and the expansion of services for multipurpose trips (e.g. cargo e‑bikes, shared (e‑)bikes with baby seats, kids’ bikes) could also contribute to making shared and sustainable mobility more attractive.

20. The national recovery packages of Chile (Chile Apoya), Colombia (Nuevo Compromiso por el Futuro de Colombia), Panama (Plan para la Recuperación Económica) and Peru (Arranca Perú) were revised. Transport and residential policies were also revised individually for these countries and for cities such as Buenos Aires (Argentina), Bogota (Colombia) and Mexico City (Mexico).

21. Shallow retrofits are one‑off measures instead of deep retrofits, which reduce energy usage beyond 50%

22. For passive houses, total primary energy demand should not exceed 120 kWh per m 2 annually for all services.

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Chapter 3

Structural change for a new development model

The recovery agenda in the LAC region calls for an integrated holistic approach that enables a green and just transition. This chapter presents three key building blocks to advance a more sustainable development model in LAC: energy, production and social protection. The chapter starts by analysing the current energy matrix and goes on to look at the possibilities industrial policies and the circular and the blue economy offer for enhancing current productive structures. Lastly, it reviews the potential impacts the green transition could have on the future of work, and the role social protection systems can play in protecting the most vulnerable during the transition.

Structural change for a new development model